<PAGE>
As filed with the Securities and Exchange Commission on December 22, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
FirstWorld Communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware 4813 33-0521976
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification Code Number)
organization) Number)
--------------
8390 E. Crescent Parkway, Suite 300
Greenwood Village, CO 80111
(303) 874-8010
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Jeffrey L. Dykes, Esq.
Senior Vice President, General Counsel and Secretary
FirstWorld Communications, Inc.
8390 E. Crescent Parkway, Suite 300
Greenwood Village, CO 80111
(303) 874-8010
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies To:
Michael L. Platt, Esq. James S. Scott, Sr., Esq.
Michael D. Stack, Esq. John T. Blatchford, Esq.
Cooley Godward llp Shearman & Sterling
2595 Canyon Boulevard, Suite 250 599 Lexington Avenue
Boulder, CO 80302-6737 New York, NY 10022-6069
(303) 546-4000 (212) 848-4000
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Aggregate Amount of
Title of Securities Offering Registration
To be Registered Price (1)(2) Fee
- --------------------------------------------------------------------------------
<S> <C> <C>
Series B Common Stock, $.0001 par value.......... $100,000,000 $26,400
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</TABLE>
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(1) Includes shares that the underwriters have the option to purchase solely to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o).
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
Explanatory Note: This registration statement contains two forms of
prospectus: one to be used in connection with an offering in the United States
and Canada and one to be used in a concurrent offering outside the United
States and Canada. The prospectuses are identical except for the front cover
page. The U.S. prospectus is included in this registration statement and is
followed by the alternate page to be used in the international prospectus. The
alternate page for the international prospectus included herein is labeled
"Alternate Page for International Prospectus." Final forms of each prospectus
will be filed with the Securities and Exchange Commission under Rule 424(b).
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated December 22, 1999
PROSPECTUS
[FIRSTWORLD LOGO]
Shares
FirstWorld Communications, Inc.
Series B Common Stock
--------------------------------------------------------
This is our initial public offering of shares of common stock. No public market
currently exists for our shares. We are offering shares. Of the
shares being offered, we are offering shares in the United States and
Canada and shares outside the United States and Canada.
We propose to list the shares on the Nasdaq National Market under the symbol
"FWIS". We anticipate the public offering price to be between $ and $
per share.
Investing in the shares involves risks. Risk Factors begin on page 7.
<TABLE>
<CAPTION>
Per Share Total
--------- ---------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds to FirstWorld Communications....................... $ $
</TABLE>
We have granted the underwriters the right to purchase up to additional
shares within 30 days to cover any over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 2000.
--------------------------------------------------------
Lehman Brothers
Bear, Stearns & Co. Inc.
Deutsche Banc Alex. Brown
PaineWebber Incorporated
, 2000
<PAGE>
[Graphical depiction of FirstWorld's backbone network, depicting the
portion of United States including and west of the Chicago metropolitan area.
The map identifies the metropolitan areas in which FirstWorld currently has a
sales presence, including:
. Denver;
. Salt Lake City;
. San Francisco;
. Los Angeles;
. Houston;
. Portland;
. Chicago; and
. San Diego.
Finally, the map identifies metropolitan areas in which FirstWorld expects
to have a sales presence by the end of 2000, including;
. Seattle; and
. Dallas.
The map also identifies Denver as FirstWorld's headquarters. In addition,
the map depicts cities in which we intend to use Enron's long-haul network to
serve our customers.]
<PAGE>
[Description of inside cover]
[Graphic entitled FirstWorld Internet Data Center, depicting our data center
architecture including:
. DSL access concentrater (Redback);
. Telecom platform (Lucent Pathstar);
. Internet platform (Cisco, Sun and Oracle);
. Multi-service access platform;
. Redundant infrastructure for power, security, monitoring, management
and backup;
. Dedicated/managed servers; and
. Customer co-location.]
[FirstWorld Logo]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Summary Consolidated Financial
Data............................... 4
Risk Factors........................ 7
Special Note Regarding Forward-
Looking Statements; Market Data.... 19
Use of Proceeds..................... 20
Dividend Policy..................... 20
Capitalization...................... 21
Dilution............................ 22
Selected Consolidated Financial
Data............................... 23
Unaudited Pro Forma Condensed
Combined Financial Data............ 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 29
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business.............................................................. 46
Management............................................................ 65
Principal Stockholders................................................ 77
Certain Transactions.................................................. 80
Description of Capital Stock.......................................... 84
Shares Eligible for Future Sale....................................... 89
Certain United States Tax Consequences for Non-U.S. Investors......... 90
Underwriting.......................................................... 93
Legal Matters......................................................... 97
Experts............................................................... 97
Where You Can Find Additional Information............................. 97
Table of Contents to Consolidated Financial Statements................ F-1
</TABLE>
----------------
We were originally incorporated in the State of California in July 1992
under the name of Sigma Link. We changed our name to Lambda Link International
in May 1993, to SpectraNet International in September 1993, and to FirstWorld
Communications, Inc. in January 1998. We were reincorporated in the State of
Delaware in June 1998. In October 1998, we changed our fiscal year end from
September 30 to December 31. Our principal executive offices are located at
8390 E. Crescent Parkway, Suite 300, Greenwood Village, Colorado 80111 and our
phone number is (303) 874-8010.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of Series B
common stock and seeking offers to buy shares of Series B common stock only in
jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
Series B common stock.
In this prospectus, FirstWorld, we, us and our refer to FirstWorld
Communications, Inc. and its subsidiaries, unless the context otherwise
requires. The term Enron refers to Enron Corp. and its direct and indirect
subsidiaries collectively. In addition, unless otherwise indicated, all
information contained in this prospectus:
. assumes the underwriters' over-allotment option is not exercised;
. assumes no exercise of outstanding options and warrants to purchase
shares of our Series B common stock after , 2000; and
. assumes the conversion of outstanding stock appreciation rights into
options simultaneously with the closing of this offering.
Our logo and some titles and logos of our products and services mentioned
in this prospectus are either trademarks or servicemarks that we own or that
have been licensed to us. Each trademark, tradename or servicemark of any
other company appearing in this prospectus belongs to its holder.
Until (25 days after the date of this prospectus), all dealers
effecting transactions in the common stock, whether or not participating in
this distribution, may be required to deliver a prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and may
not contain all of the information that you should consider before deciding to
purchase our Series B common stock. For a more complete understanding of
FirstWorld and the shares of Series B common stock offered by this prospectus,
you should read the entire prospectus, including the risk factors, and our
consolidated financial statements and accompanying notes.
The Company
We are a rapidly growing network-based provider of Internet, data and
communications services. Our service offerings include high-speed Internet
access, such as dedicated access and digital subscriber line, or DSL; dial-up
Internet access; web hosting and design; data center services, including co-
location, access and monitoring services; e-commerce solutions; and web
integration and consulting services. To complement our data services, we also
provide local and long distance telephony services in selected markets. Our
strategy is to offer our customers a single source solution to meet the full
range of their increasingly complex Internet, data and communications needs. We
primarily market our services, using a consultative sales approach, to small-
and medium-sized businesses, and also selectively to larger businesses,
wholesale customers and consumers.
We currently offer our services in the San Francisco, Los Angeles, San
Diego, Portland, Denver, Houston, Salt Lake City and Chicago metropolitan
markets and are expanding our service offering in each of these markets to
include a comprehensive range of data products and services. We plan to enter
two additional metropolitan markets by the end of 2000. We currently operate
data centers in Glendale, San Diego, Santa Clara, Irvine and Denver, and plan
to open six additional centers in 2000. For the nine months ended September 30,
1999, we reported revenue of $36.5 million and ended the period with
approximately 71,950 active accounts, including 1,350 dedicated access, 1,450
DSL, 57,000 dial-up Internet access, 11,000 web hosting, 200 web integration
and 950 telephony accounts.
We deliver our services over a communications network that utilizes advanced
packet-switching technology and the communications protocol known as Internet
Protocol, or IP, that enables us to provide cost-effective services to our
customers. Our network combines equipment housed in our own facilities and
equipment interconnected to the incumbent local exchange carrier's central
office with redundant, high-speed connectivity to the Internet. We seek to
establish these interconnections in areas with a high density of small- and
medium-sized businesses. In addition, we have rights to use certain routes in a
nationwide, long-haul, fiber-optic network currently under construction by
Enron.
In October 1998, Sheldon S. Ohringer joined FirstWorld as President and
Chief Executive Officer and the leader of a new management team. Mr. Ohringer
was formerly the President of ICG Telecom Group, Inc., the principal operating
subsidiary of ICG Communications, Inc. Since that time we have expanded our
management team significantly, adding a number of experienced data and
communications executives. Our equity sponsors include entities controlled by
Donald L. Sturm. Mr. Sturm is a private equity investor and the former Vice
Chairman of Peter Kiewit Sons' Inc. Mr. Sturm, who participated in the decision
by Peter Kiewit Sons' to invest in MFS Communications and who owns a
significant interest in Level 3 Communications, controls entities which have
invested approximately $30 million in FirstWorld. On December 2, 1999, we
entered into an equity investment agreement with an entity controlled by Mr.
Sturm under which we can require this entity to purchase up to 6,666,667 shares
of Series B common stock. See "Certain Transactions -- Sturm Equity Investment
Agreement."
1
<PAGE>
The FirstWorld Opportunity
Data communications is the fastest growing segment of the communications
industry. Forrester Research, Inc. projects that the total market for worldwide
data networking services and Internet access will grow from $6.2 billion in
1997 to approximately $49.7 billion by 2002, of which approximately $27.9
billion will be from services to businesses. The Internet's rapid growth as an
essential communications medium has created a substantial market opportunity
for companies such as ours that provide Internet, data and communications
services. We believe this market opportunity is due to the convergence of a
number of factors, including the following:
. Growing Demand for Single Source Internet and Data Solutions. Most
companies, particularly small- and medium-sized businesses, lack the
expertise, capital or personnel required to install, maintain and monitor
their own web infrastructure and are increasingly demanding a single
source solution for their Internet, data and communications requirements
finding it more cost-effective to outsource these services.
. Growth of Small- and Medium-Sized Business Internet Market. Data
communications, particularly through the Internet, have made it possible
for smaller companies to compete more effectively with larger
competitors. Demand for data communications services from small- and
medium-sized businesses is growing, however, these businesses have
traditionally been underserved by the larger communications providers.
. Increasing Demand for High-Speed Internet Access. The growth in
bandwidth-intensive applications, and the increasing number of remote
office workers is increasing the demand for high-speed Internet
connections, particularly among small- and medium-sized businesses.
. Emergence of Third Party Co-location Services. Internet infrastructure
and applications platforms are complex and sensitive to environmental
factors, leading many businesses to rely on third parties to house,
monitor and maintain the equipment that supports their web sites, e-
commerce platforms and other business-critical applications. Third party
co-location services also allow them the flexibility to rapidly add
additional servers as their businesses grow.
Our Strategy
We intend to capitalize on the market opportunity outlined above and the key
elements of our strategy include:
. Providing single source Internet and data services to meet our customers'
needs;
. Focusing on Internet and data products while expanding our product
offerings;
. Employing a consultative sales approach to tailor our Internet, data and
communications solutions to fit our customers' business needs;
. Deploying flexible, cost-effective networks and expanding our market
footprint; and
. Pursuing a focused acquisition strategy to accelerate our penetration
into new markets, grow our customer base and increase the breadth of our
product offerings.
Our principal executive offices are located at 8390 E. Crescent Parkway,
Suite 300, Greenwood Village, Colorado 80111, and our telephone number is (303)
874-8010. Our World Wide Web address is www.firstworld.com. The information on
our web site is not incorporated by reference into this prospectus.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C> <C> <C>
Series B common stock offered................ shares
Series B common stock offered in the:
United States offering............................ shares
International offering............................ shares
-----
Total........................................... shares
=====
Common stock to be outstanding after the
offering:
Series A common stock............................. shares
Series B common stock............................. shares
-----
Total........................................... shares
=====
</TABLE>
<TABLE>
<S> <C>
Over-allotment option........................ shares of Series B common stock
Voting rights:
Series A common stock...................... Ten votes per share
Series B common stock...................... One vote per share
Use of proceeds.............................. We will receive net proceeds from this
offering of approximately $ million.
We intend to use the net proceeds to expand
our sales and marketing efforts, fund our
operating losses, hire additional
personnel, fund potential acquisitions,
fund our capital expenditures and product
development, provide working capital and
for general corporate purposes. See "Use of
Proceeds."
Dividend policy.............................. We have not paid any dividends on our
common stock and do not intend to pay
dividends on our common stock in the
foreseeable future. We plan to retain any
earnings for use in the operation of our
business and to fund future growth. See
"Dividend Policy." We have not generated
net income and do not expect to do so for
several years.
Proposed Nasdaq National Market symbol....... FWIS
</TABLE>
The foregoing information is based on 28,778,006 shares of Series A and
Series B common stock outstanding as of November 30, 1999 and excludes:
. 6,585,392 Series B shares of common stock (including 589,825 of stock
appreciation rights that are anticipated to be cancelled and reissued as
stock options to purchase Series B common stock) issuable upon the
exercise of outstanding stock options as of November 30, 1999 at exercise
prices ranging from $.25 to $7.50 per share, with a weighted average
exercise price of $6.21 per share;
. Any exercise of our agreement with an entity controlled by Donald L.
Sturm that allows us to sell up to 6,666,667 shares of Series B common
stock at a price of $7.50 per share;
. 25,048,527 Series B shares of common stock issuable upon the exercise of
outstanding warrants at exercise prices ranging from $.01 to $6.00 per
share, with a weighted average exercise price of $2.52 per share; and
. 2,689,452 Series B shares of common stock reserved for issuance under our
stock plans.
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data.
These data do not present all of our financial information. You should read
this information together with the consolidated financial statements and the
notes to those statements appearing elsewhere in this prospectus and the
information under "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
data for each of the three years ended September 30, 1998 have been derived
from the audited financial statements appearing elsewhere in this prospectus.
The data for the three month transition period ended December 31, 1998 and for
the nine month period ended September 30, 1999 have been derived from the
audited financial statements appearing elsewhere in this prospectus. The data
for the nine month period ended September 30, 1998 have been derived from the
unaudited financial statements appearing elsewhere in this prospectus and, in
our management's opinion, include all adjustments consisting of normal
recurring items necessary for a fair presentation of our results of operations
and financial position. The results of operations for the three months ended
December 31, 1998 and the nine months ended September 30, 1998 and 1999 are not
necessarily indicative of the results of operations that may be expected for
the full year. Certain prior period amounts have been reclassified to conform
to the 1999 basis of presentation.
<TABLE>
<CAPTION>
Three Months Nine Months
Year Ended September 30, Ended Ended September 30,
-------------------------------- December 31, -----------------------
1996 1997 1998 1998 1998 1999
--------- --------- ---------- ------------ ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Internet services...... $ -- $ -- $ -- $ 123 $ -- $ 13,203
Web integration and
consulting services.... -- -- -- 2,285 -- 20,013
Telephony services..... 354 171 1,091 565 977 3,246
--------- --------- ---------- ---------- ---------- ----------
Total revenue........ 354 171 1,091 2,973 977 36,462
--------- --------- ---------- ---------- ---------- ----------
Operating expenses:
Network and service
costs................. 247 474 1,029 2,707 885 25,776
Selling, general and
administrative........ 3,870 7,421 16,113 10,812 13,865 45,955
Depreciation and
amortization.......... 75 501 2,425 1,812 1,947 14,924
--------- --------- ---------- ---------- ---------- ----------
Total operating
expenses............ 4,192 8,396 19,567 15,331 16,697 86,655
--------- --------- ---------- ---------- ---------- ----------
Loss from operations.... (3,838) (8,225) (18,476) (12,358) (15,720) (50,193)
Other income (expense):
Interest income........ 9 149 6,749 3,227 6,742 5,929
Interest expense....... (27) (1,372) (16,898) (8,600) (15,549) (28,125)
--------- --------- ---------- ---------- ---------- ----------
Loss before
extraordinary item..... (3,856) (9,448) (28,625) (17,731) (24,527) (72,389)
Extraordinary loss--
extinguishment of
debt................... -- (105) (4,731) -- (4,731) --
--------- --------- ---------- ---------- ---------- ----------
Net loss................ $ (3,856) $ (9,553) $ (33,356) $ (17,731) $ (29,258) $ (72,389)
========= ========= ========== ========== ========== ==========
Basic and diluted loss
per common share:
Loss before
extraordinary item.... $ (1.38) $ (2.95) $ (1.56) $ (0.68) $ (1.05) $ (2.64)
Extraordinary loss--
extinguishment of
debt.................. -- (.03) (.25) -- (.20) --
--------- --------- ---------- ---------- ---------- ----------
Net loss per common
share................. $ (1.38) $ (2.98) $ (1.81) $ (0.68) $ (1.25) $ (2.64)
========= ========= ========== ========== ========== ==========
Weighted average shares
outstanding:
Basic and diluted...... 2,792,250 3,209,450 18,395,172 26,196,664 23,411,474 27,471,288
========= ========= ========== ========== ========== ==========
Other Data:
EBITDA.................. $ (3,763) $ (7,724) $ (16,051) $ (10,546) $ (13,773) $ (33,377)
Capital expenditures.... 908 12,637 26,068 15,518 23,578 42,798
Consolidated Cash Flow
Data:
Net cash provided (used)
by operating
activities............. $ (2,168) $ (7,446) $ (10,133) $ 134 $ (9,066) $ (22,477)
Net cash provided (used)
by investing
activities............. (923) (12,647) (191,659) (42,264) (189,169) 51,948
Net cash provided (used)
by financing
activities............. 3,156 20,557 273,295 (250) 270,004 (968)
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
September 30, September 30, 1999
------------------------- ---------------------
December 31, As
1996 1997 1998 1998 Actual Adjusted
------- ------- ------- ------------ ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents ........... $ 72 $ 536 $72,039 $29,659 $58,162 $
Marketable Securities... --- --- 165,591 170,030 30,523 30,523
Working capital
(deficit).............. (1,801) (3,319) 233,059 190,589 69,269
Property and equipment,
net.................... 1,088 20,331 44,020 61,247 100,825 100,825
Total assets............ 1,427 25,321 294,105 294,816 277,699
Long-term debt,
including current
portion................ 1,009 19,684 256,659 265,427 293,040 293,040
Total stockholders'
equity (deficit)....... (1,541) 2,264 29,373 11,794 (47,651)
</TABLE>
The Statement of Operations data for the three months ended December 31,
1998 presented above include our results for the entire three months and for
Optec for the period from November 24, 1998, the date of our acquisition of
Optec, through December 31, 1998. The Statement of Operations data for the nine
months ended September 30, 1999 presented above include the results for
FirstWorld and Optec for the entire nine month period and for Slip.Net, Sirius,
Hypercon, Internet Express, inQuo, Transport Logic and Intelenet, beginning
with their respective acquisition dates through September 30, 1999.
The as adjusted balance sheet information presented above gives effect to
the issuance and sale of shares of common stock offered in this
offering at an assumed initial public offering price of $ per share,
after deducting the estimated underwriting discounts, commissions and offering
expenses.
EBITDA, shown above under "Other Data," consists of earnings before
interest, income taxes, extraordinary loss, depreciation and amortization and a
one-time, non-cash litigation charge for the nine months ended September 30,
1999 of $1.9 million. We have included information concerning EBITDA in this
prospectus because this type of information is commonly used in the
communications industry as one measure of a company's operating performance and
liquidity. EBITDA is not determined using generally accepted accounting
principles and, therefore, EBITDA is not necessarily comparable to EBITDA as
calculated by other companies. EBITDA also does not indicate cash provided by
operating activities. You should not use our EBITDA as a measure of our
operating income and cash flows from operations under generally accepted
accounting principles. Both of those measures are presented above. You also
should not look at our EBITDA in isolation, as an alternative to or as more
meaningful than measures of performance determined in accordance with generally
accepted accounting principles.
5
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table sets forth summary unaudited pro forma condensed
combined financial data and summary historical consolidated financial data for
the year ended September 30, 1998, the three month transitional period ended
December 31, 1998 and the nine months ended September 30, 1999. This pro forma
financial information assumes that our acquisitions of Optec, Slip.Net, Sirius,
Hypercon, Internet Express, inQuo, Transport Logic and Intelenet, which were
completed in 1998 and 1999, had occurred on October 1, 1997. Please refer to
"Unaudited Pro Forma Condensed Combined Financial Data" for a more detailed
presentation of our pro forma information.
<TABLE>
<CAPTION>
Year Ended Three Months Ended Nine Months Ended
September 30, 1998 December 31, 1998 September 30, 1999
---------------------- ---------------------- -----------------------
Historical Pro Forma Historical Pro Forma Historical Pro Forma
---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Internet services...... $ -- $ 18,577 $ 123 $ 6,202 $ 13,203 $ 22,853
Web integration and
consulting services -- 14,766 2,285 5,401 20,013 20,013
Telephony services..... 1,091 1,091 565 565 3,246 3,246
---------- ---------- ---------- ---------- ---------- ----------
Total revenue.......... 1,091 34,434 2,973 12,168 36,462 46,112
---------- ---------- ---------- ---------- ---------- ----------
Cost and expenses:
Operating expenses..... 17,142 49,389 13,519 23,484 71,731 81,083
Depreciation and
amortization.......... 2,425 22,807 1,812 6,942 14,924 22,373
---------- ---------- ---------- ---------- ---------- ----------
Total operating
expense............... 19,567 72,196 15,331 30,426 86,655 103,456
---------- ---------- ---------- ---------- ---------- ----------
Loss from operations.... (18,476) (37,762) (12,358) (18,258) (50,193) (57,344)
---------- ---------- ---------- ---------- ---------- ----------
Other income:
Other income
(expense)............. 6,749 3,501 3,227 2,523 5,929 5,392
Interest expense....... (16,898) (17,196) (8,600) (8,728) (28,125) (28,281)
---------- ---------- ---------- ---------- ---------- ----------
Total other expense.... (10,149) (13,695) (5,373) (6,205) (22,196) (22,889)
---------- ---------- ---------- ---------- ---------- ----------
Net loss from continuing
operations............. $ (28,625) $ (51,457) $ (17,731) $ (24,463) $ (72,389) $ (80,233)
========== ========== ========== ========== ========== ==========
Net loss from continuing
operations per common
share:
Basic and diluted...... $ (1.56) $ (2.55) $ (.68) $ (.87) $ (2.64) $ (2.82)
========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding:
Basic and diluted...... 18,395,172 20,215,600 26,196,664 28,017,092 27,471,288 28,483,705
========== ========== ========== ========== ========== ==========
Other Data:
EBITDA.................. $ (16,051) $ (15,170) $ (10,546) $ (11,316) $ (33,377) $ (34,971)
</TABLE>
6
<PAGE>
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the risks and uncertainties described
below and the other information in this prospectus before you decide to buy
our common stock.
Evaluating Our Current Business Is Difficult Because Our Business Plan Is
Unproven and We Have a Limited Operating History
It is difficult to value our business and evaluate our prospects because we
are not aware of any other company that has generated net income from a
similar business plan. We have limited historical financial and operating data
related to our current business for you to review in evaluating our current
business and prospects. We did not begin to develop and offer Internet and
data services until December 1998. From October 1, 1993 through September 30,
1999, we generated net losses of approximately $138.2 million on revenue of
only approximately $41.2 million. Our unproven business plan creates a
significant risk that the value of our common stock will decline.
We Expect Our Losses and Negative Cash Flow to Continue
We expect to incur substantial operating and net losses and negative
operating cash flow for the foreseeable future. We intend to rapidly and
substantially increase our capital expenditures and operating expenses in an
effort to expand our network services. To date, we have incurred substantial
operating losses, net losses and negative operating cash flow. As of September
30, 1999, we had an accumulated deficit of $138.2 million. For the nine months
ended September 30, 1999, we had an operating loss of $50.2 million, a net
loss of $72.4 million and negative cash flow from operations of $22.5 million.
We have funded our operations through the private sale of debt and equity
securities and have not generated any income from our business to date. If we
fail to generate positive cash flows and net income, there will be a
significant risk that the value of our common stock will decline.
The Market for Our Data and Internet Solutions Is New and Evolving and We
Cannot Predict Whether the Market in General or the Market for Our Services
Will Continue to Grow
The market for Internet, data and communications services is new and
rapidly evolving. Although we expect demand for these services to grow, we
cannot assure you that this growth will occur. Certain critical issues
concerning commercial viability of these services, including security,
reliability, ease and cost of access and quality of service, may remain
unresolved and may negatively impact our growth. To be successful, we must
develop and market our services in a rapidly changing marketplace. Therefore,
there is a risk that our services will become obsolete before they can be
profitably sold, but only to the extent we have spent money to develop and
market them. If the market for our services grows more slowly than we
anticipate or becomes saturated with competitors, there will be a significant
risk that the value of our common stock will decline.
As a Young Company, We May Not Be Able to Effectively Execute Our Business
Plan
You should consider our business and prospects in light of the risks and
difficulties typically encountered by companies in their early stages of
development, particularly those in rapidly evolving and intensively
competitive markets such as ours. Some of the specific risks include whether
we will be able to:
. attract and retain customers;
. accurately assess potential markets and effectively respond to
competitive developments;
. continue to develop and integrate our operational support systems and
other back office systems;
. raise additional capital;
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. enter into interconnection, co-location agreements and working
arrangements with incumbent carriers, substantially all of whom we expect
to be our competitors;
. rapidly expand the geographic coverage of our services;
. deploy an effective network infrastructure;
. effectively manage our expanding operations;
. comply with evolving governmental regulatory requirements;
. increase awareness of our services; and
. attract, retain and motivate qualified personnel.
We may not be successful in addressing these and other risks, and our
failure to do so would create a significant risk that the value of our common
stock will decline.
We Are Subject to Intense Price Competition
For many communications services, including the services we offer, there is
a negligible marginal cost of providing an additional unit of service. As a
result, there have been rapid and continuing price reductions, particularly
for Internet access services. Accordingly, we may need to reduce our prices to
remain competitive. Price competition could result in lower margins and
therefore, create a significant risk that the value of our common stock will
decline.
We May Not Be Able to Compete Successfully
We face significant competition in providing our services. Most of our
competitors, as well as a number of our potential competitors, have
significantly greater financial, sales and marketing resources, larger
customer bases, longer operating histories, greater name recognition, embedded
infrastructure and more established relationships with vendors, distributors
and partners than we have. These factors place us at a disadvantage when we
respond to our competitors' pricing strategies, technological advances and
other initiatives. Additionally, our competitors may develop services that are
superior to ours or that achieve greater market acceptance.
We expect the level of competition to intensify, particularly given the
current regulatory environment. We have not obtained significant market share
in any of the areas where we offer or intend to offer services, nor do we
expect to do so given the size of the Internet, data and communications
market, the intense competition and the diversity of customer needs. In each
market area in which we provide services, we compete or will compete with
several other service providers and the technologies they use. We may not be
able to compete successfully with these current or future competitors, which
creates a significant risk that the value of our common stock will decline.
Please refer to "Business--Competition" for further discussion of our
competitive environment.
We Face Risks Involving Acquired Businesses and Potential Acquisitions
We have grown rapidly by acquiring other businesses. In the nine months
ended September 30, 1999, we acquired seven businesses. We expect that a
portion of our future growth will result from additional acquisitions, some of
which may be material. Growth through acquisitions entails numerous risks,
including:
. significant strain on our financial, management and operational
resources, including the distraction of our management team in
identifying potential acquisition targets, conducting due diligence and
negotiating acquisition agreements;
. difficulties in integrating the network, operations, personnel, products,
technologies and financial, computer, payroll and other systems of the
acquired businesses;
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. difficulties in enhancing our customer support resources to adequately
service our existing customers and the customers of the acquired
businesses;
. the potential loss of key employees or customers of the acquired
businesses;
. entering geographic and business markets in which we have little or no
prior experience;
. unanticipated liabilities or contingencies of acquired businesses;
. fluctuations in our operating results caused by incurring considerable
expenses to acquire businesses before receiving the anticipated revenues
expected to result from the acquisitions;
. reduced earnings due to increased goodwill amortization from acquired
businesses; and
. dilution to existing stockholders if we use stock to acquire businesses.
We cannot assure you that we will be able to successfully complete the
integration of the businesses which we have already acquired or successfully
integrate any businesses that we might acquire in the future. If we fail to do
so, there will be a significant risk that the value of our common stock will
decline.
Industry Consolidation Could Make It More Difficult to Compete
Companies offering Internet, data and communications services are
increasingly consolidating. As a company with a limited operating history, we
may not be able to compete successfully with businesses that have combined, or
will combine, to produce companies with substantially greater financial, sales
and marketing resources, larger customer bases, extended networks and
infrastructures and more established relationships with vendors, distributors
and partners than we have. In addition, this consolidation trend could prevent
or hinder our ability to further grow our operations through acquisitions.
With these heightened competitive pressures, there is a significant risk that
the value of our common stock will decline.
We Need Significant Additional Capital
We believe that our current capital resources, including the proceeds of
this offering and the proceeds of the 1999 equity investment agreement, will
be sufficient to fund our capital expenditures and working capital
requirements, including operating losses, for approximately the next 12
months. We will need significant additional financing after that. In addition,
our actual funding requirements may differ materially if our assumptions
underlying this estimate turn out to be incorrect. We may seek additional
financing earlier than we currently anticipate if:
. we alter the schedule, proposed markets or scope of our network rollout
plan;
. we acquire other businesses; or
. we are unable to generate revenues in the amount and in the time frame we
expect or we experience unexpected cost increases.
We may not be able to raise sufficient additional capital at all or on
terms that we consider acceptable. If we are unable to obtain adequate funds
on acceptable terms and on a timely basis, our ability to operate and deploy
our networks, fund our expansion or respond to competitive pressures would be
significantly impaired. This limitation could create a significant risk that
the value of our common stock will decline.
We Have a Substantial Amount of Debt
We are highly leveraged, and we may seek additional debt funding in the
future. As of September 30, 1999, we had approximately $293.0 million of
outstanding debt and an accumulated deficit of $138.2 million. We have $470.0
million in principal amount at maturity of 13% senior discount notes due 2008
outstanding. Payment of interest on these notes does not begin until October
15, 2003. Instead, they accrete, which means they effectively increase in
principal amount, from $284.4 million at September 30, 1999 to $470.0 million
at April 15, 2003. We are not generating sufficient revenue to fund our
operations or to repay our debt. Our existing substantial leverage poses, and
any future leverage may pose, the risk that:
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. we may be unable to repay our debt;
. we may be unable to obtain additional financing;
. we must dedicate a substantial portion of our cash flow from operations,
if any, to pay interest on our debt generally beginning in 2003, and if
any cash flow remains after that, it may not be adequate to fund our
operations; and
. we may be more vulnerable during economic downturns, less able to
withstand competitive pressures and less flexible in responding to
changing business and economic conditions.
Additionally, our outstanding debt imposes significant restrictions on how
we can conduct our business. For example, the restrictions prohibit or limit
our ability to incur additional debt and make dividend payments. The
restrictions may materially and adversely affect our ability to finance future
operations or capital needs or conduct additional business activities. Any
future debt that we may incur would also likely impose restrictions on us. If
we fail to comply with any of these restrictions, we would be in default. If
we default, the holders of the applicable debt could demand that we pay the
debt, including interest, immediately. This would create a significant risk
that the value of our common stock will decline.
Our Failure to Manage Our Growth Could Impair Our Business
We have rapidly and significantly expanded our operations. We anticipate
further significant expansion of our operations in an effort to achieve our
network rollout and deployment objectives. Our expansion to date has strained
our management, financial controls, operational support systems, personnel and
other resources. Any future expansion could increase these strains. If our
marketing strategy is successful, we may experience difficulties responding to
customer demand for services and technical support in a timely manner and in
accordance with their expectations. As a result, rapid growth of our business
would make it difficult to implement our strategy successfully and to provide
superior customer service. We may not be able to manage growth of our
operations if we do not:
. improve existing and implement new operational, financial and management
information controls, reporting systems and procedures;
. hire, train and manage additional qualified personnel;
. expand and upgrade our network and technologies; and
. effectively manage multiple relationships with our customers, suppliers
and other third parties.
We may not be able to install management information and control systems in
an efficient and timely manner, and our current or planned personnel, systems,
procedures and controls may not be adequate to support our future operations.
Failure to manage our future growth effectively could adversely affect the
expansion of our customer base and service offerings. Any failure to
successfully address these issues could create a significant risk that the
value of our common stock will decline.
We May Not Be Able to Grow Our Business Unless We Keep Pace with Rapidly
Changing Technologies
Our industry is characterized by:
. rapid technological change;
. changing customer needs;
. frequent new product and service introductions; and
. evolving industry standards.
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These market characteristics could render our existing services,
technologies, network infrastructure and systems obsolete. We may be unable to
obtain access to new technologies on acceptable terms or at all, and we may be
unable to adapt to new technologies and offer services in a competitive
manner. New technologies, industry standards and products may not be
compatible with our existing technologies and current business plan, and we
cannot predict the effect of technological changes on our business. As a
result, there is a significant risk that the value of our common stock will
decline.
Our Business Could Suffer if High Quality Network Capacity, Services and
Products That We Obtain from Third Parties Are Not Available or Cost More Than
We Expect
We depend on third parties to maintain and provide us key components of our
network infrastructure. Our business, prospects, financial condition and
operating results may suffer if the third parties we depend on to provide
network services and infrastructure fail to maintain the operational integrity
of their networks or increase their cost. In part, we rely on and will
continue to rely on third parties, including certain of our competitors and
potential competitors, for the development of and access to communications and
networking technologies. We expect that new products and technologies
applicable to our market will emerge. For example, we depend on data
communications equipment providers and equipment providers, such as Pacific
Bell, UUNET, Sprint, NorthPoint, Covad, Lucent and Cisco to provide the data
and communications capacity and equipment we, and our customers, require. If
these components are unavailable or cost more than we expect, there is a
significant risk that the value of our common stock will decline.
Our Business Could Suffer if We Are Unable to Expand and Adapt Our Network
Infrastructure to Meet Our Customers' Demands
We must continue to expand and adapt our network. We also plan to build a
number of data centers to house our Internet, data and voice equipment. If we
are unable to expand and adapt our network infrastructure and build our data
centers on a cost-effective and timely basis, we may lose customers. We have
had limited deployment of our services and limited experience in building data
center facilities. Accordingly, we do not know whether our network and data
center facilities will be able to handle, connect and manage large numbers of
users at high transmission speeds. In addition, future attempts to increase
our network capacity and data center facilities may be delayed or cause
further network complications. We may encounter equipment or software
incompatibility, among other things, if we upgrade our network to increase its
capacity. These problems may cause delays in our attempts to expand or improve
our services.
In order to generate additional revenue, we must continue to expand and
adapt our network infrastructure as the number of users and their bandwidth
demands increase and as customer requirements change. We cannot be sure that
we will be able to do so on a timely basis, at a commercially reasonable cost,
or at all. Any such failure would create a significant risk that the value of
our common stock will decline.
We Are Dependent on the Incumbent Local Exchange Carriers
We rely on the incumbent local exchange carriers for copper and fiber optic
telephone lines and co-location space. In some cases, we also rely on them for
transmission between our co-located offices and our data centers. These
carriers compete with us in providing DSL and other services and, accordingly,
may be reluctant to make capital expenditures to purchase and install
additional equipment or cooperate with us in meeting our supply needs. The
Federal Communications Commission currently requires incumbent local exchange
carriers to take affirmative steps to enable competitive local exchange
carriers to offer service over the incumbent local exchange carriers'
networks. The FCC's current rules give the incumbent carriers flexibility
regarding the timing, technical standards and charges, which the incumbent
carriers may use to delay performance of loop conditioning that we may need to
provide service.
Additionally, we plan to co-locate our equipment and facilities at the
central offices of many of the incumbent local exchange carriers. Co-location
space may not be available in a particular central office, and we
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may face competition from other communications companies to obtain available
space. The incumbent carriers may reject some of our co-location applications,
and we may experience delays. The 1996 Telecommunications Act requires that,
in order to qualify for authority to sell long distance services, the former
Bell operating company incumbent local carriers must cooperate with other
communications companies in establishing co-location facilities. These
incumbent carriers will probably be less cooperative with us after such
authority is granted. These incumbent carriers are not subject to similar
legal requirements in providing transmission facilities to our data center
facilities. If the incumbent carriers do not provide us with transmission
facilities on a timely basis and we are unable to obtain transmission
facilities from other providers, the rollout of our network may be delayed,
which could create a significant risk that the value of our common stock will
decline.
Interference or Claims of Interference Could Delay our Rollout or Harm our DSL
Services
All transport technologies deployed on copper telephone lines have the
potential to interfere with, or to be interfered with by, other transport
technologies on copper telephone lines. We believe that our DSL technologies,
like other transport technologies, do not interfere with existing telephony
services. Nevertheless, incumbent carriers may claim that the potential for
interference permits them to restrict or delay our deployment of DSL services.
Interference could degrade the performance of our services or make us unable
to provide service on selected lines. The procedures to resolve interference
issues between competitive carriers and incumbent carriers are still being
developed, and these procedures may not be effective. We may be unable to
successfully negotiate interference resolution procedures with incumbent
carriers. Moreover, incumbent carriers may make claims regarding interference
or unilaterally take action to resolve interference issues to the detriment of
our services. State or federal regulators could also institute responsive
actions. Interference, or claims of interference, if widespread, would
adversely affect our speed of deployment and customer satisfaction and
retention which could cause the value of our common shares to decline.
We Are Unable to Control the Terms and Conditions Under Which We Gain Access
to the Incumbent Local Carriers Co-Location and Transmission Facilities
We must negotiate the terms under which we co-locate our equipment, connect
to copper and fiber optic telephone lines and gain the use of the incumbent
local carriers' transmission facilities. State and federal tariffs, state
public utility commissions, the FCC and interconnection agreements with the
incumbent local carriers determine the price, terms and conditions under which
co-location space is made available as well as the terms and conditions of
access to copper and fiber optic telephone lines and other network components.
Currently, the incumbent local carriers unilaterally set the spectrum
capability and spectrum management policies that determine whether our service
can be provided over a particular copper and fiber optic telephone line
without creating interference with other services and the measures we would be
required to take in order to solve any interference problems. The FCC has
adopted rules that facilitate a competitively neutral process for resolving
some interference issues and has proposed additional requirements but has not
yet made a ruling on these issues. These issues may create a significant risk
that the value of our common stock will decline.
We Are Unable to Control the Terms or Timing of Extending Our Interconnection
Agreements
Our access to the incumbent local carriers' co-location and transmission
facilities and copper and fiber optic lines depends on our ability to maintain
interconnection agreements with the incumbent carriers. Many of our
interconnection agreements provide that if the term expires before we have a
replacement agreement, we may continue on the rates, terms and conditions of
the original interconnection agreement on a month-to-month basis, but we may
not be able to take advantage of any lower prices that the incumbent carriers
may offer. Some of our other interconnection agreements provide that if the
term expires before we have a replacement agreement, the rates, terms and
conditions of the original interconnection agreement may be superseded by more
generic and potentially less favorable rates, terms and conditions. In
addition, we may not be able to negotiate new agreements on terms favorable to
us.
State regulatory commissions, the FCC and the courts oversee our
interconnection agreements as well as the terms and conditions under which we
gain access to incumbent local carrier copper and fiber optic telephone
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lines and transmission facilities and co-location. These governmental entities
may modify the terms or prices applicable to our interconnection agreements
and the terms governing our access to copper and fiber optic telephone lines,
transmission facilities, and co-location in ways that would be adverse to our
business. These issues may create a significant risk that the value of our
common stock will decline.
Some of our Switching Technologies and Equipment Have a Very Limited
Performance History
Some of the switching technologies and equipment that we intend to use in
our network services are relatively new, have not been commercially proven and
may be unreliable. For example, our switching platform incorporates the Lucent
Pathstar, which is a new technology that has a very limited operating history.
We were one of the first companies to deploy this new technology for local
switching and currently have deployed it in only one of our markets. We intend
to install three Lucent Pathstar's by the end of 2000. Any failure by Lucent
to provide these switches to us on a timely basis would delay the roll out of
our services and our business plan.
If any of our switching technologies contain undetected design faults or
"bugs," interruption of service to our customers or delay in our deployment
could negatively affect our financial performance. We cannot assure you that
our switching platforms will perform as expected or that we will be successful
in deploying them in all of our markets in a timely manner. These factors
could result in a significant risk that the value of our common stock will
decline.
A System Failure or Breach of Network Security Could Cause Delays or
Interruptions of Service to Our Customers Which Could Materially and Adversely
Affect Our Business
Our success in marketing our services to business customers requires that
we provide reliable, continuous and secure service. Interruptions in service,
capacity limitations or security breaches could have a material adverse effect
on our reputation and customer acceptance of our services. Our networks and
those of third parties on whom we rely are subject to damage from human error,
earthquakes, floods, other natural disasters, power loss, capacity
limitations, software defects, breaches of security (by computer virus, break-
ins or otherwise) and other factors. In addition, our operations may be
disrupted by unannounced or unexpected changes in transmission protocols or
other technological issues that may not be easily resolved. These problems
could result in unanticipated and extended system disruptions, slower response
times, impaired quality and reduced levels of customer service, any of which
could create a significant risk that the value of our common stock will
decline.
Despite our design and implementation of a variety of network security
measures, breaches such as unauthorized access, computer viruses, or other
disruptions could occur. In addition, we may incur significant costs to
prevent breaches in security or to alleviate problems caused by such breaches.
Any breaches that may occur could result in liability to us, loss of existing
customers and the deterrence of future customers.
We May Encounter Difficulty in Upgrading Our Billing and Operational Support
Systems
We are in the process of upgrading our billing and operational support
systems to accommodate our planned expansion and to achieve operating
efficiencies. Although we have selected vendors with established software
packages for these upgrades, the installation and implementation of the new
billing and operational support systems involve a significant commitment of
resources and are subject to a number of risks, including:
. the potential incurrence of substantial third party consulting costs;
. delays in implementation;
. undetected software errors;
. conflicts with our existing hardware and software systems; and
. difficulties arising from continuing business operations during
implementation.
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The failure to successfully install and implement new billing and
operational support systems in a timely fashion could create a significant
risk that the value of our common stock will decline.
Our Success Depends on Our Retention of Certain Key Personnel and Our Ability
to Hire Additional Key Personnel
Competition in the Internet, data and communications services industries is
intense for qualified executives, and technical, sales and marketing
personnel. Moreover, these industries have a high level of employee mobility
and aggressive recruiting of key personnel. As a result of these factors, we
may not be able to attract and retain the qualified personnel on whom our
future success depends.
In addition, our success depends on the performance of our officers and key
employees, especially our Chief Executive Officer. Members of our senior
management team have worked together at our company for only a short period of
time. Any of our executive officers may terminate their employment with us at
any time.
We Rely Primarily on a Direct Sales Method Which May Not Be Cost-Effective
We market our products and services primarily through our own staff. Our
markets are new, and our direct marketing efforts may not be an effective
means of selling Internet, data and communications services. Many of our
competitors are selling their services indirectly through Internet service
providers, carriers, resellers and integrators. Our direct method may prove to
be a more costly approach. We may not achieve a level of sales sufficient to
justify maintaining our own marketing force and sales staff.
An Unfavorable Outcome of a Lawsuit Filed Against Us by the City of Anaheim
Could Harm Us
On May 13, 1999, the City of Anaheim filed a lawsuit in Orange County
Superior Court, against us and one of our subsidiaries, FirstWorld Anaheim.
The City alleges that we and our subsidiary repudiated our respective
contractual obligations under a series of agreements that we entered into with
the City in February 1997 primarily relating to the development of a fiber-
optic network located in Anaheim, California. In addition, the City alleges,
among other things, that we materially breached certain of our obligations
under these agreements. The City alleges that it is entitled to damages in
excess of $45 million. The City also seeks specific performance compelling us
to completely perform some or all of our obligations under the agreements. In
response to the lawsuit, we filed a motion to compel arbitration and requested
a stay of the court proceeding. On October 6, 1999 the court entered a written
order granting our motion and finding that there is a valid arbitration
provision in the agreements and that the City had not established that we
unequivocally repudiated the agreements. The court action has been stayed
pending the completion of the arbitration, and the City has not commenced
arbitration procedures pursuant to the arbitration provision in the
agreements. We believe that we are not in breach of the agreements as alleged
and intend to vigorously defend any such claims by the City. However, the
outcome of this dispute is uncertain and cannot be predicted at this time. Any
adverse result could have a material adverse effect on our company's financial
condition and results of operations. See "Business--Litigation."
Our Services Are Subject to Government Regulation, and Changes in Current or
Future Laws or Regulations Could Restrict the Way We Operate Our Business
We are subject to regulation by the FCC, state public service and public
utility commissions and local governments as a provider of communications
services. Changes in existing policies or regulations in the states and
localities in which we provide services or by the FCC could create a
significant risk that the value of our common stock will decline, particularly
if those regulatory or policy changes make it more difficult to obtain
unbundled network elements from the incumbent local exchange carriers at
competitive prices, restrict access to public rights of way or otherwise
increase the cost and regulatory burdens of providing our services. There can
be no assurance that regulatory authorities in the areas we serve or the FCC
will not take actions having an adverse effect on the value of our common
stock. The Telecommunications Act has significantly altered regulation of the
telecommunications industry by preempting state and local laws to the extent
that they prevent competition and by imposing a variety of new duties on local
exchange carriers and the incumbent local carriers
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in order to promote competition in local exchange and access services.
Although we believe that the Telecommunications Act and other trends in
federal and state legislation and regulation that favor increased competition
are to our advantage, there can be no assurance that the increased competitive
opportunities or other changes in current regulations or future regulations at
the federal or state level will not create a significant risk that the value
of our common stock will decline.
Challenges to Governmental Regulation Could Increase Our Operating Costs
We are subject to FCC and state regulation for our interconnection
arrangements with the incumbent local carriers in our markets. The scope of
this regulation is uncertain because it is the subject of ongoing court and
administrative proceedings. Several parties have brought court challenges to
the FCC's interconnection rules, including the rules that establish the terms
under which a competitive communications company may use portions of an
incumbent local carrier's network and that define the particular network
elements to which we are entitled to access. If a rule that is beneficial to
our business is struck down by the courts, it could harm our ability to
compete. In particular, the courts may determine that the FCC's pricing rules
are unlawful, which would require the FCC to establish a new pricing
methodology. If this occurs, the new pricing methodology may result in our
having to pay a higher price to the incumbent local carriers to use a portion
of their networks in providing our services, which could create a significant
risk that the value of our common stock will decline.
Recently, the FCC issued a decision that an incumbent local carrier's data
services are subject to unbundling and resale requirements. The FCC is still
considering alternative corporate structures for the incumbent local carriers
that would allow them to compete more directly with other companies like us on
an unregulated basis. This issue is still pending before the FCC. An FCC
decision in favor of the incumbent local carriers could create a significant
risk that the value of our common stock will decline.
A Recent U.S. Supreme Court Decision Has Raised Questions About Our Ability to
Obtain Essential Facilities From Incumbent Local Carriers, Which May Hurt Our
Business
A January 1999 decision by the U.S. Supreme Court has raised questions
about whether we will be able to obtain network elements to provide data and
voice services in the future from the incumbent local carriers. In that
decision, the Supreme Court invalidated an FCC rule defining the particular
elements of an incumbent local carrier's network that must be provided to
competitors like us, and it sent the matter back to the FCC with instructions
to consider further the question of which elements of an incumbent local
carrier's network must be provided to competitors. The FCC has stated that it
plans to issue a new decision later this year. We would be adversely affected
if the FCC were to specify a set of elements that does not include the
elements that we need to provide our services.
We May Be Liable for Information Disseminated through Our Network
The law relating to the liability of Internet service providers and private
network operators for information carried on or disseminated through the
facilities of their networks is currently unsettled. The costs incurred in
defending against any claims and potential adverse outcomes of such claims
could have a material adverse effect on the value of our common stock. Several
lawsuits seeking a judgment of such liability are pending. While such claims
have not been asserted against us, we cannot be sure that such claims will not
be asserted in the future, or if asserted, will not be successful. The
Telecommunications Act prohibits and imposes criminal penalties and civil
liability for using an interactive computer service for transmitting certain
types of information and content, such as obscene communications. Numerous
states have adopted or are currently considering similar types of legislation.
The imposition upon us of potential liability for materials carried on or
disseminated through our systems could require us to implement measures to
reduce our exposure to such liability, which may require the expenditure of
substantial resources or the discontinuation of certain product or service
offerings. We believe that it is currently unclear whether the
Telecommunications Act prohibits or imposes liability for any of our services
should the content of information transmitted be subject to the statute.
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Our Limited Ability to Protect Our Intellectual Property Rights May Adversely
Affect Our Ability to Compete
Trademarks, service marks, trade secrets and copyrights are important to
our success and competitive position. Our efforts to protect our proprietary
rights may be inadequate and may not prevent others from claiming violations
of their proprietary rights. If we invoke legal proceedings to enforce our
proprietary rights, the proceedings could be burdensome and expensive. Our
technology may be misappropriated or a third party may independently develop
technologies that are substantially equivalent or superior to ours.
We May be Subject to Claims Alleging Infringement of Third parties'
Intellectual Property Rights
We may be subject to claims alleging that we have infringed third party
proprietary rights. If we were to discover that any of our services infringed
a third party's rights, we may not be able to obtain permission to use those
rights on commercially reasonable terms. If we must defend against alleged
infringements, the proceedings could be burdensome and expensive and could
involve a high degree of risk. Any of these events could create a significant
risk that the value of our common stock will decline.
Our management personnel were previously employees of other communications
companies. In many cases, these individuals are performing activities for us
in areas similar to those in which they were involved prior to joining us. As
a result, we or our employees could be subject to allegations of trade secret
violations and other similar claims. If such claims materialize, there is a
significant risk that the value of our common stock will decline.
Our Principal Stockholders and Management Own a Significant Percentage of Our
Company and Will Be Able to Exercise Significant Influence Over Our Company
As of November 30, 1999, three limited liability companies controlled by
Donald L. Sturm (the "Sturm Entities") beneficially owned approximately 51.4%
of our outstanding common stock, including 49.3% of our outstanding Series A
common stock (assuming only the exercise of outstanding warrants held by the
Sturm Entities). The Series A common stock has ten votes per share, as
compared to one vote per share for the Series B common stock. By virtue of
these super-voting rights of the Series A common stock, the Sturm Entities
control approximately 50.0% of the voting power of our outstanding common
stock. As of November 30, 1999, Enron beneficially owned approximately 44.5%
of our outstanding common stock, including 49.3% of our Series A common stock.
By virtue of the super-voting rights of the Series A common stock, Enron
controls approximately 48.0% of the outstanding voting power of our common
stock. In addition, the Sturm Entities are entitled to appoint three directors
and Enron is entitled to appoint two directors to our seven-person Board of
Directors. These rights terminate on the second anniversary of the closing of
this offering. As a result of their respective ownership interests and Board
designees, the Sturm Entities and Enron, together control our company. The
Sturm Entities and Enron have the ability to control the election of at least
a majority of our directors and any other major decisions involving our
company or its assets. If we exercise our rights under the equity investment
agreement with an additional entity controlled by Mr. Sturm, the beneficial
ownership of entities he controls will be increased. This agreement is
discussed in the section of this prospectus entitled "Certain Transactions -
Sturm Equity Investment Agreement."
In addition to their investments in our company, the Sturm Entities and
Enron have investments, and may in the future make investments, in other
communications companies and ventures, including our competitors. We, the
Sturm Entities and Enron have agreed that the Sturm Entities and Enron are
under no obligation to bring to our company any investment or business
opportunities of which they become aware, even if such opportunities are
within our scope and objectives, and that the Sturm Entities and Enron may
compete with us. As a result, the Sturm Entities and/or Enron may compete with
us to obtain business or for the acquisitions of companies.
Our Capital Structure and Some of Our Anti-Takeover Provisions May Discourage
Our Acquisition by Others and Thus Depress Our Stock Price
The ownership and voting interests possessed by the Sturm Entities and
Enron make it impossible for a third party to acquire control of us without
their consent. In addition, some of the provisions that may be included
16
<PAGE>
in our certificate of incorporation and bylaws may discourage, delay or
prevent a merger or acquisition at a premium price. These provisions include:
. authorizing the issuance of "blank check" preferred stock;
. eliminating the ability of stockholders to call a special meeting of
stockholders;
. limiting the removal of directors by the stockholders to removal for
cause; and
. requiring a super-majority stockholder vote to effect certain amendments.
The indenture governing our outstanding senior notes requires us to offer
to repurchase all senior discount notes at a premium, within 30 days after a
change of control. This could also discourage an acquisition.
Our Failure and The Failure of Third Parties to Be Year 2000 Compliant Could
Negatively Impact Our Business
Failure of our internal computer systems or third-party hardware, software,
or systems to operate properly with regard to Year 2000 and thereafter could
cause systems interruptions or loss of data or could require us to incur
significant unanticipated expenses to remedy any problems. The expenses
associated with our efforts to remedy any Year 2000 problems, the expenses or
liabilities to which we may become subject as a result of such problems or the
impact of Year 2000 problems on the ability of our existing or future
customers to conduct business with us could create a significant risk that the
value of our common stock will decline.
We have done an extensive review of our software, hardware and third-party
interfaces to evaluate their Year 2000 compliance and we are continuing to
assess the functionality of our systems and our vendors' systems to determine
whether these systems will require updating to continue to function properly
beyond 1999. There can be no assurance that we will be able to identify all
Year 2000 problems in our systems in advance of their occurrence or that we
will be able to successfully remedy any problems. In addition, to the extent
that our suppliers, including the incumbent local exchange carriers over whose
networks we provide certain of our services, fail to address Year 2000 issues
in a timely and effective manner, our ability to provide uninterrupted,
reliable service to customers serviced through such networks may be adversely
affected. Moreover, the profitability and stability of our customers may be
adversely affected by Year 2000 problems not related to their relationships
with us. The expenses associated with our efforts to remedy any Year 2000
problems, the expenses or liabilities to which we may become subject as a
result of such problems or the impact of Year 2000 problems on the ability of
existing or future customers to do business with us could create a significant
risk that the value of our common stock will decline. Please refer to our
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Readiness Disclosure."
Future Sales of Our Common Stock in the Public Market Could Depress Our Stock
Price
Sales of substantial amounts of common stock in the public market following
this offering, or the appearance that a large number of shares is available
for sale, could adversely affect the market price for the common stock. The
number of shares of common stock available for sale in the public market will
be limited by lock-up agreements under which our executive officers, directors
and principal stockholders, who will collectively hold % of our common
stock after this offering, or % if the underwriters exercise their over-
allotment option in full, have agreed not to sell or otherwise dispose of any
of their shares for a period of 180 days after the date of this prospectus
without the prior written consent of Lehman Brothers Inc. In addition to the
adverse effect a price decline could have on holders of common stock, that
decline would likely impede our ability to raise capital through the issuance
of additional shares of common stock or other equity securities.
After this offering, the holders of shares of common stock will have
the right to require us to register the sale of their shares, subject to
limitations and to the lock-up agreements with the underwriters. Within
17
<PAGE>
approximately 180 days after this offering, we intend to file a registration
statement under the Securities Act to register shares of common stock
for issuance under our 1999 Employee Stock Purchase Plan. The sale of these
additional shares into the public market may further adversely affect the
market price of our common stock.
You Will Incur Immediate and Substantial Dilution of the Book Value of Your
Shares
Prior investors paid a lower per share price than the price in this
offering. The initial public offering price is substantially higher than the
as adjusted net negative tangible book value per share of the outstanding
common stock immediately after this offering. Accordingly, if you purchase
common stock in this offering, you will incur immediate and substantial
dilution of $ in the as adjusted net negative tangible book value per
share of the common stock from the price you pay for the common stock in this
offering. See "Dilution."
18
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS; MARKET DATA
Some of the statements contained in this prospectus are not historical
facts, including some statements made in the sections of this prospectus
entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
are statements of future expectations and other forward-looking statements. We
use words such as expect, intend, plan, project, believe, estimate and
anticipate, and variations of these words and similar expressions to identify
such forward-looking statements. These statements are based on management's
current views and assumptions and involve known and unknown risks and
uncertainties that could cause actual results, performance or events to differ
materially from those expressed or implied in those statements, including:
. the rate of expansion of our network and/or customer base;
. inaccuracies in our internal forecasts of communications traffic or
customers;
. the loss of a customer or distributor that provides us with significant
revenues;
. highly competitive market conditions;
. the failure of FirstWorld or of third parties to remediate Year 2000
issues;
. changes in or developments under laws, regulations, licensing
requirements or telecommunications standards;
. changes in the availability of transmission facilities;
. changes in retail or wholesale communications rates;
. changes in technology;
. the loss of the services of key officers, such as Sheldon S. Ohringer,
our Chief Executive Officer; and
. general economic conditions.
The foregoing important factors should not be construed as exhaustive. We
undertake no obligations to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. See also
"Risk Factors" for additional cautionary statements identifying important
factors with respect to forward-looking statements contained in this
prospectus that could cause actual results to differ materially from results
or expectations referred to in the forward-looking statements.
This prospectus contains market data related to us and our industry. These
data have been included in the studies of market research firms International
Data Corporation, Forrester Research and eStats. These market research firms
assume certain events, trends and activities will occur and they project
information on those assumptions. We do not know all of the assumptions made
by these firms and are not able to assess the basis for their assumptions. In
particular, we do not know what level of growth in the U.S. economy these
firms have assumed, or whether they have assumed that there would be a
recession. If the market research firms are wrong about any of their
assumptions, then their projections may also be wrong. Other market research
firms, whose projections we have not included in this prospectus, make
different assumptions and different projections than those made by
International Data Corporation, Forrester Research and eStats.
19
<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $ million in net
proceeds from this offering, or $ if the underwriters' overallotment
option is exercised in full, based upon an assumed initial public offering of
$ per share. This amount reflects deductions from the gross proceeds of
the offering of underwriting discounts and commissions and our estimated
offering expenses.
We expect to use the net proceeds to:
. expand our sales and marketing efforts;
. fund our operating losses;
. hire additional personnel;
. fund potential acquisitions;
. fund our capital expenditures and product development; and
. provide working capital and for other general corporate purposes.
The amounts we actually spend in these areas may vary significantly and
will depend on a number of factors, including our future revenues. We may also
use a portion of the net proceeds to acquire or invest in complimentary
businesses, technologies, services or products.
Pending such uses, we will invest the net proceeds of this offering in
short term, interest bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. The terms of our outstanding indebtedness
limit our ability to pay dividends. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will depend
upon our financial condition, operating results, capital requirements and
other factors that our board of directors deems relevant.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
This information is presented:
. on an actual basis; and
. on an as adjusted basis to give effect to the issuance and sale of
shares of common stock offered in this offering at an assumed
initial public offering price of $ per share, after deducting the
estimated underwriting discounts and commissions and offering expenses.
This table should be read together with the financial statements and notes
to those statements appearing in this prospectus.
<TABLE>
<CAPTION>
September 30,
1999
------------------
As
Actual Adjusted
-------- --------
(in thousands, except
share amounts)
<S> <C> <C> <C>
Long-term obligations:
Long-term debt, net of discount...................... $284,587 $284,587
Capital lease obligations............................ 7,587 7,587
-------- --------
Total long-term debt............................... 292,174 292,174
-------- --------
Stockholders' equity (deficit):
Preferred stock, $.0001 par value, 10,000,000 shares
authorized; no shares issued or outstanding.........
Common stock, $.0001 par value, 100,000,000 shares
authorized; 10,135,164 designated Series A and
89,864,836 designated Series B
Series A, 10,135,164 shares issued and outstanding;
and 10,135,164 issued and outstanding as
adjusted.......................................... 1 1
Series B, 18,564,926 shares issued and outstanding;
and issued and outstanding as adjusted....... 2
Additional paid-in capital............................. 58,661
Warrants............................................... 31,963 31,963
Stockholder receivables................................ (45) (45)
Accumulated deficit.................................... (138,233) (138,233)
-------- --------
Total stockholders' equity (deficit)............... (47,651)
-------- --------
Total capitalization............................. $244,523 $
======== ========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of September 30, 1999. We are
permitted, and in some cases obligated, to issue shares of common stock in
addition to the common stock to be outstanding after this offering. The
following is a summary of these additional shares of common stock at September
30, 1999:
. 6,707,997 shares of Series B common stock (including 632,700 of stock
appreciation rights that are anticipated to be cancelled and reissued as
stock options to purchase Series B common stock) issuable upon exercise
of options outstanding under our stock option plans at exercise prices
ranging from $.25 to $7.50 per share, with a weighted average exercise
price of $6.17 per share;
. 25,048,527 shares of Series B common stock subject to issuance upon
exercise of outstanding warrants at exercise prices ranging from $ .01 to
$6.00 per share, with a weighted average exercise price of $2.52 per
share; and
. 2,707,877 shares of Series B common stock reserved for issuance under our
stock plans.
. up to 6,666,667 shares of Series B common stock subject to issuance upon
exercise of the Sturm equity investment agreement with an entity
controlled by Donald L. Sturm discussed in the section of this prospectus
entitled "Certain Transactions--Sturm Equity Investment Agreement."
21
<PAGE>
DILUTION
Our negative net tangible book value as of September 30, 1999 was
approximately $108.7 million, or negative $3.79 per share. Negative net
tangible book value represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding.
Without taking into account any other changes in the negative net tangible
book value after September 30, 1999, other than to give effect to our receipt
of the net proceeds from the sale of the shares of Series B common
stock in this offering at an assumed initial public offering price of $
per share, our pro forma, net tangible book value as of September 30, 1999
would have been approximately $ , or $ per share. This represents
an immediate increase in net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $
Negative net tangible book value per share as of September
30, 1999................................................... $
Increase in net tangible book value per share attributable
to new investors...........................................
--------
Pro forma net tangible book value per share after this
offering....................................................
Dilution per share to new investors.......................... $
========
</TABLE>
The following table summarizes, on the as adjusted basis described above as
of September 30, 1999, the differences between existing stockholders and the
new investors with respect to:
. the number of shares of common stock purchased from us;
. the total consideration paid to us; and
. the average price per share paid, before deducting estimated discounts
and commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ------------- ---
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders... 28,700,090 % $58,661,000 % $2.04
New investors...........
---------- ----- ----------- -----
Total................. 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
The foregoing discussion and tables assume no exercise of the underwriters'
over-allotment option or of any outstanding stock options or warrants after
September 30, 1999. As of September 30, 1999, there were outstanding options
to purchase an aggregate of 6,707,997 shares of Series B common stock
(including 632,700 of stock appreciation rights anticipated to be cancelled
and reissued as stock options) at a weighted average exercise price $6.17 per
share and warrants to purchase an aggregate of 25,048,527 shares of Series B
common stock at a weighted average exercise price of $2.52 per share. In
addition, the foregoing discussion does not include any additional options
issued through November 30, 1999 or any exercise under the Sturm equity
investment agreement allowing us to sell 6,666,667 shares of Series B common
stock at a purchase price of $7.50 per share. There will be further dilution
to new investors to the extent any of these options or warrants are exercised.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The financial data set forth below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere
in this prospectus. The data for each of the three years ended September 30,
1998 have been derived from the audited financial statements appearing
elsewhere in this prospectus. The data for the three months ended December 31,
1998 and for the nine months ended September 30, 1999 have been derived from
the audited financial statements appearing elsewhere in this prospectus. The
data for the three months ended December 31, 1997 and for the nine months
September 30, 1998 have been derived from the unaudited financial statements
appearing elsewhere in this prospectus. The selected financial data for the
years ended September 30, 1994 and 1995 have been derived from audited
financial statements not included in this prospectus. The results of
operations for the three months ended December 31, 1997 and 1998 and the nine
months ended September 30, 1998 and 1999 are not necessarily indicative of the
results of operations that may be expected for a full year. In our
management's opinion, the accompanying consolidated financial statements
include all adjustments (consisting of normal recurring items) necessary for a
fair presentation of our results of operations and financial position. Certain
prior period amounts have been reclassified to conform to the 1999 basis of
presentation.
<TABLE>
<CAPTION>
Three Months Ended Nine Months
Year Ended September 30, December 31, Ended September 30,
------------------------------------------------------ --------------------- -----------------------
1994 1995 1996 1997 1998 1997 1998 1998 1999
--------- --------- --------- --------- ---------- --------- ---------- ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenue:
Internet
services......... $ -- $ -- $ -- $ -- $ -- $ -- $ 123 $ -- $ 13,203
Web integration
and consulting
services......... -- -- -- -- -- -- 2,285 -- 20,013
Telephony
services......... 85 97 354 171 1,091 114 565 977 3,246
--------- --------- --------- --------- ---------- --------- ---------- ---------- ----------
Total revenue... 85 97 354 171 1,091 114 2,973 977 36,462
--------- --------- --------- --------- ---------- --------- ---------- ---------- ----------
Operating expenses:
Network and
service costs.... -- 188 247 474 1,029 144 2,707 885 25,776
Selling, general
and
administrative... 429 740 3,870 7,421 16,113 2,248 10,812 13,865 45,955
Depreciation and
amortization..... 21 39 75 501 2,425 478 1,812 1,947 14,924
--------- --------- --------- --------- ---------- --------- ---------- ---------- ----------
Total operating
expenses....... 450 967 4,192 8,396 19,567 2,870 15,331 16,697 86,655
--------- --------- --------- --------- ---------- --------- ---------- ---------- ----------
Loss from
operations........ (365) (870) (3,838) (8,225) (18,476) (2,756) (12,358) (15,720) (50,193)
Other income
(expense):
Interest income... -- -- 9 149 6,749 7 3,227 6,742 5,929
Interest
expense.......... (53) (38) (27) (1,372) (16,898) (1,349) (8,600) (15,549) (28,125)
--------- --------- --------- --------- ---------- --------- ---------- ---------- ----------
Loss before
extraordinary
item.............. (418) (908) (3,856) (9,448) (28,625) (4,098) (17,731) (24,527) (72,389)
Extraordinary
loss--
extinguishment of
debt.............. -- -- -- (105) (4,731) -- -- (4,731) --
--------- --------- --------- --------- ---------- --------- ---------- ---------- ----------
Net loss........... $ (418) $ (908) $ (3,856) $ (9,553) $ (33,356) $ (4,098) $ (17,731) $ (29,258) $ (72,389)
========= ========= ========= ========= ========== ========= ========== ========== ==========
Basic and diluted
loss per common
share:
Loss before
extraordinary
item............. $ (.16) $ (.34) $ (1.38) $ (2.95) $ (1.56) $ (1.25) $ (0.68) $ (1.05) $ (2.64)
Extraordinary
loss--
extinguishment
of debt.......... -- -- -- (.03) (.25) -- -- (.20) --
--------- --------- --------- --------- ---------- --------- ---------- ---------- ----------
Net loss per
common share..... $ (.16) $ (.34) $ (1.38) $ (2.98) $ (1.81) $ (1.25) $ (0.68) $ (1.25) $ (2.64)
========= ========= ========= ========= ========== ========= ========== ========== ==========
Weighted average
shares
outstanding:
Basic and
diluted.......... 2,659,500 2,706,000 2,792,250 3,209,450 18,395,172 3,265,567 26,196,664 23,411,474 27,471,288
========= ========= ========= ========= ========== ========= ========== ========== ==========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended Nine Months
Year Ended September 30, December 31, Ended September 30,
--------------------------------------------- ------------------ --------------------
1994 1995 1996 1997 1998 1997 1998 1998 1999
------ ------ -------- -------- --------- -------- -------- --------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA.................. $ (344) $ (831) $ (3,763) $ (7,724) $ (16,051) (2,278) $(10,546) $ (13,773) $ (33,377)
Capital expenditures.... 6 25 908 12,637 26,068 2,490 15,518 23,578 42,798
Consolidated Cash Flow
Data:
Net cash provided (used)
by operating
activities............. $ (416) $ (781) $ (2,168) $ (7,446) $ (10,133) $ (1,117) $ 134 $ (9,066) $ (22,477)
Net cash provided (used)
by investing
activities............. 18 45 (923) (12,647) (191,659) (2,490) (42,264) (189,169) 51,948
Net cash provided (used)
by financing
activities............. 425 827 3,156 20,557 273,295 3,291 (250) 270,004 (968)
</TABLE>
<TABLE>
<CAPTION>
September 30,
---------------------------------------- December 31, September 30,
1994 1995 1996 1997 1998 1998 1999
----- ----- ------- ------- -------- ------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, and cash
equivalents ........... $ 4 $ 6 $ 72 $ 536 $ 72,039 $ 29,659 $ 58,162
Marketable Securities... --- --- --- --- 165,591 170,030 30,523
Working capital
(deficit).............. (522) (192) (1,801) (3,319) 233,059 190,589 69,269
Property and equipment,
net.................... 76 122 1,088 20,331 44,020 61,247 100,825
Total assets............ 145 173 1,427 25,321 294,105 294,816 277,699
Long-term debt,
including current
portion................ 328 106 1,009 19,684 256,659 265,427 293,040
Total stockholders'
equity (deficit)....... (424) (68) (1,541) 2,264 29,373 11,794 (47,651)
</TABLE>
The Statement of Operations data for the three months ended December 31,
1998 presented above include our results for the entire three months and for
Optec for the period from November 24, 1998, the date of our acquisition of
Optec, through December 31, 1998. The Statement of Operations data for the
nine months ended September 30, 1999 presented above include our results for
FirstWorld and Optec for the entire nine month period and for Slip.Net,
Sirius, Hypercon, Internet Express, inQuo, Transport Logic and Intelenet,
beginning with their respective acquisition dates through September 30, 1999.
EBITDA, shown above under "Other Data," consists of earnings before
interest, income taxes, extraordinary loss, depreciation and amortization and
a one-time, non-cash litigation charge for the nine months ended September 30,
1999 of $1.9 million. We have included information concerning EBITDA in this
prospectus because this type of information is commonly used in the
communications industry as one measure of a company's operating performance
and liquidity. EBITDA is not determined using generally accepted accounting
principles and, therefore, EBITDA is not necessarily comparable to EBITDA as
calculated by other companies. EBITDA also does not indicate cash provided by
operating activities. You should not use our EBITDA as a measure of our
operating income and cash flows from operations under generally accepted
accounting principles. Both of those measures are presented above. You also
should not look at our EBITDA in isolation, as an alternative to or as more
meaningful than measures of performance determined in accordance with
generally accepted accounting principles.
24
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following tables set forth selected historical consolidated financial
information and unaudited pro forma condensed combined financial data. The pro
forma information reflects our acquisitions of Optec, Slip.Net, Sirius,
Hypercon, Internet Express, inQuo, Transport Logic and Intelenet, using the
purchase method of accounting, and the effects of those acquisitions. We have
presented this pro forma information to give you a better understanding of
what our business might have looked like had we owned these acquired companies
since October 1, 1997. These companies may have performed differently if they
had actually been combined with our operations during these periods. You
should not rely on the unaudited pro forma information as indicative of the
historical results that we would have had or the future results that we will
experience after the acquisitions. These pro forma results do not necessarily
represent results that would have occurred if the consolidated acquisitions
had taken place as of October 1, 1997. A pro forma condensed combined balance
sheet as of September 30, 1999 is not presented as the effects of all
acquisitions are included in the historical consolidated balance sheet data as
of September 30, 1999 presented in "Selected Consolidated Financial Data--
Balance Sheet Data."
The tables present the unaudited pro forma condensed combined statement of
operations data for the following periods:
. the year ended September 30, 1998;
. the three months ended December 31, 1998; and
. the nine months ended September 30, 1999.
The historical columns include our results for the entire period for each
of the periods presented. In addition, the historical columns include data for
each of the acquisitions beginning on their respective acquisition date
through the end of the period presented. The acquisitions columns include the
data for the acquired entities from the beginning of the period through their
respective acquisition date. Thus, the Unaudited Pro Forma Condensed Combined
Statements of Operations, inclusive of adjustments, give effect to all
acquisitions as if they had occurred on October 1, 1997. The foregoing
purchase price allocations are preliminary and are subject to adjustment. The
final purchase price allocations are not expected to be substantially
different from the preliminary allocations.
The pro forma adjustments are based upon available information and certain
adjustments that our management believes are reasonable. Additionally, our
management believes that all adjustments have been made to present fairly the
unaudited pro forma condensed combined financial data.
Historical financial statements of the individual acquired companies are
not included in this prospectus because they are not significant either
individually or in the aggregate.
25
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended September 30, 1998
<TABLE>
<CAPTION>
Pro Forma
Historical Acquisitions Adjustments Pro Forma
---------- ------------ ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Revenue:
Internet services....... $ -- $18,577 $ -- $ 18,577
Web integration and
consulting services.... -- 14,766 -- 14,766
Telephony services...... 1,091 -- -- 1,091
---------- ------- --------- ----------
Total revenue......... 1,091 33,343 -- 34,434
---------- ------- --------- ----------
Costs and expenses:
Operating expenses...... 17,142 32,247 -- 49,389
Depreciation and
amortization........... 2,425 1,266 19,116(a) 22,807
---------- ------- --------- ----------
Total operating
expense.............. 19,567 33,513 19,116 72,196
---------- ------- --------- ----------
Loss from operations.. (18,476) (170) (19,116) (37,762)
---------- ------- --------- ----------
Other income (expense):
Other income (expense).. 6,749 (337) (2,911)(b) 3,501
Interest expense........ (16,898) (298) -- (17,196)
---------- ------- --------- ----------
Total other income
(expense)............ (10,149) (635) (2,911) (13,695)
---------- ------- --------- ----------
Net loss from
continuing
operations........... $ (28,625) $ (805) $ (22,027) $ (51,457)
========== ======= ========= ==========
Net loss from continuing
operations per share:
Basic and diluted....... $ (1.56) $ (2.55)
========== ==========
Weighted average shares
outstanding:
Basic and diluted....... 18,395,172 1,820,428(c) 20,215,600
========== ========= ==========
</TABLE>
- --------
The following pro forma adjustments have been made to the above.
(a) Represents the recognition of amortization of goodwill associated with
the various acquisitions as if they had been acquired on October 1,
1997. $56.0 million of goodwill is amortized on a straight-line basis
over the estimated useful life of three years for all acquired
companies other than Optec. $5.6 million of goodwill associated with
Optec is amortized on a straight-line basis over 10 years.
(b) Represents interest income reflected in the historical FirstWorld
statement of operations that would not have been earned if the
acquisitions had occurred on October 1, 1997.
(c) Represents shares issued associated with the various acquisitions as
follows:
<TABLE>
<CAPTION>
Acquisition Shares
----------- ---------
<S> <C>
Slip.Net..........................................187,500
Sirius............................................285,000
Hypercon...........................................49,993
Internet Express...................................30,000
Transport Logic...................................392,935
Intelenet.........................................875,000
---------
1,820,428
=========
</TABLE>
26
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended December 31, 1998
<TABLE>
<CAPTION>
Pro Forma
Historical Acquisitions Adjustments Pro Forma
---------- ------------ ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Revenue:
Internet services....... $ 123 $ 6,079 $ -- $ 6,202
Web integration and
consulting services.... 2,285 3,116 -- 5,401
Telephony services...... 565 -- -- 565
---------- ------- --------- ----------
Total revenue......... 2,973 9,195 -- 12,168
---------- ------- --------- ----------
Costs and expenses:
Operating expenses...... 13,519 9,965 -- 23,484
Depreciation and
amortization........... 1,812 444 4,686(a) 6,942
---------- ------- --------- ----------
Total operating
expense.............. 15,331 10,409 4,686 30,426
---------- ------- --------- ----------
Loss from operations.. (12,358) (1,214) (4,686) (18,258)
---------- ------- --------- ----------
Other income (expense):
Other income (expense).. 3,227 (15) (689)(b) 2,523
Interest expense........ (8,600) (128) -- (8,728)
---------- ------- --------- ----------
Total other income
(expense)............ (5,373) (143) (689) (6,205)
---------- ------- --------- ----------
Net loss from
continuing
operations........... $ (17,731) $(1,357) $ (5,375) $ (24,463)
========== ======= ========= ==========
Net loss from continuing
operations per share:
Basic and diluted....... $ (.68) $ (.87)
========== ==========
Weighted average shares
outstanding:
Basic and diluted....... 26,196,664 1,820,428(c) 28,017,092
========== ========= ==========
</TABLE>
- --------
The following pro forma adjustments have been made to the above.
(a) Represents the recognition of amortization of goodwill associated with
the various acquisitions as if they had been acquired on October 1,
1997. $56.0 million of goodwill is amortized on a straight-line basis
over the estimated useful life of three years for all acquired
companies other than Optec. $5.6 million of goodwill associated with
Optec is amortized on a straight-line basis over 10 years.
(b) Represents interest income reflected in the historical FirstWorld
statement of operations that would not have been earned if the
acquisitions had occurred on October 1, 1997.
(c) Represents shares issued associated with the various acquisitions as
follows:
<TABLE>
<CAPTION>
Acquisitions Shares
------------ ---------
<S> <C>
Slip.Net....................................... 187,500
Sirius......................................... 285,000
Hypercon....................................... 49,993
Internet Express............................... 30,000
Transport Logic................................ 392,935
Intelenet...................................... 875,000
---------
1,820,428
=========
</TABLE>
27
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Pro Forma
Historical Acquisitions Adjustments Pro Forma
---------- ------------ ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Revenue:
Internet services....... $ 13,203 $9,650 $ -- $ 22,853
Web integration and
consulting services.... 20,013 -- -- 20,013
Telephony services...... 3,246 -- -- 3,246
---------- ------ --------- ----------
Total revenue......... 36,462 9,650 -- 46,112
---------- ------ --------- ----------
Costs and expenses:
Operating expenses...... 71,731 9,352 -- 81,083
Depreciation and
amortization........... 14,924 883 6,566(a) 22,373
---------- ------ --------- ----------
Total operating
expense.............. 86,655 10,235 6,566 103,456
---------- ------ --------- ----------
Loss from operations.. (50,193) (585) (6,566) (57,344)
---------- ------ --------- ----------
Other income (expense):
Other income (expense).. 5,929 325 (862)(b) 5,392
Interest expense........ (28,125) (156) -- (28,281)
---------- ------ --------- ----------
Total other income
(expense)............ (22,196) 169 (862) (22,889)
---------- ------ --------- ----------
Net loss from
continuing
operations........... $ (72,389) $ (416) $ (7,428) $ (80,233)
========== ====== ========= ==========
Net loss from continuing
operations per share:
Basic and diluted....... $ (2.64) $ (2.82)
========== ==========
Weighted average shares
outstanding:
Basic and diluted....... 27,471,288 1,012,417(c) 28,483,705
========== ========= ==========
</TABLE>
- --------
The following pro forma adjustments have been made to the above.
(a) Represents the recognition of amortization of goodwill associated with
the various acquisitions as if they had been acquired on October 1,
1997. $56.0 million of goodwill is amortized on a straight-line basis
over the estimated useful life of three years for all acquired
companies other than Optec. $5.6 million of goodwill associated with
Optec is amortized on a straight-line basis over 10 years.
(b) Represents interest income reflected in the historical FirstWorld
statement of operations that would not have been earned if the
acquisitions had occurred on October 1, 1997.
(c) Represents the additional shares that would have been outstanding at
the beginning of the period had we acquired the following entities on
January 1, 1999:
<TABLE>
<CAPTION>
Incremental Weighted
Acquisitions Average Shares
------------ --------------------
<S> <C>
Slip.Net............................ 4,167
Sirius.............................. 61,222
Hypercon............................ 27,959
Internet Express.................... 18,222
Transport Logic..................... 272,144
Intelenet........................... 628,703
---------
1,012,417
=========
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected
Consolidated Financial Data" and the financial statements and related notes
included elsewhere in this prospectus. This discussion contains forward-
looking statements that involve risks and uncertainties. Our actual results
may differ materially from those indicated in such forward looking statements.
Please see "Risk Factors" and "Special Note Regarding Forward-Looking
Statements; Market Data" elsewhere in this prospectus.
Overview
We are a rapidly growing network-based provider of Internet, data and
communications services. Our service offerings include high-speed Internet
access, such as dedicated access and DSL; dial-up Internet access; web hosting
and design; data center services, including co-location, access and monitoring
services; e-commerce solutions; and web integration and consulting services.
To complement our data services, we also provide local and long distance
telephony services in selected markets. Our strategy is to offer our customers
a single source solution to meet the full range of their increasingly complex
Internet, data and communications needs. We primarily market our services,
using a consultative sales approach, to small- and medium-sized businesses,
and also selectively to larger businesses, wholesale customers and consumers.
We currently provide services in eight metropolitan markets and intend to
expand our market footprint to ten markets by the end of 2000.
Prior to 1997, we were engaged in the business of engineering, designing
and installing fiber optic communications networks for third parties. Revenue
generated from these activities has been shown as telephony services revenue.
In 1997, we stopped bidding on engineering contracts in order to focus on the
design and construction of our own communications network to service the Los
Angeles metropolitan market. We commenced network operations in August 1997.
Substantially all of our revenues generated in 1997 and 1998 resulted from
providing telephony services to customers in the Los Angeles metropolitan
market. In October 1998, Sheldon S. Ohringer joined our company as President
and Chief Executive Officer. Since that time, we have expanded our management
team significantly, adding a number of experienced data and communications
executives.
To capitalize on the growing demand for data services, the fastest growing
segment of the communications industry, we made a strategic decision in the
fourth quarter of 1998 to expand our services and emphasize data services and
expand our market footprint. As a result of this decision, we began to acquire
data communications companies beginning in November 1998. Since that time, we
have acquired eight data communications and Internet companies in seven
metropolitan markets. These acquisitions have significantly expanded our
market presence and substantially increased our revenue.
We currently provide selected Internet and data services in the San
Francisco, San Diego, Portland, Denver, Houston, Salt Lake City and Chicago
metropolitan markets, and provide Internet, data and communications services
in the Los Angeles metropolitan market. We are expanding our service offering
in each of the markets we have entered in the last year to offer a broad range
of data products and services. In addition to entering new markets on our own,
we plan to aggressively acquire data communications companies in additional
markets.
From October 1, 1993 through September 30, 1999, we generated cumulative
net losses of approximately $138.2 million and approximately $43.3 million of
negative cash flow from operations. We expect that operating and net losses
and negative operating cash flow will continue for at least the next several
years and will increase significantly as we implement our growth strategy of
expanding into new markets.
In October 1998, we changed our fiscal year end from September 30 to
December 31. We had a three-month transition period from October 1, 1998
through December 31, 1998.
29
<PAGE>
Recent Acquisitions
Optec
On November 24, 1998, we acquired Optec, Inc., a company with operations in
Oregon and Washington that provides web integration services to businesses,
from Enron. As part of this acquisition, we also acquired rights to use fiber
optic cable in parts of Oregon and rights to OC-3 level capacity to connect up
to 15 cities on a nationwide long-haul network being developed by Enron. As
consideration for the acquisition, we paid $18.3 million in cash and repaid
$4.0 million of Optec's outstanding debt. We assigned values of $11.1 million,
$9.2 million and $2.0 million to the long-haul network rights, Optec and the
Oregon fiber optic rights, respectively. Since the long-haul network rights
have not yet been placed into service, we are not amortizing this asset. We
accounted for the acquisition of Optec under the purchase method of
accounting. Approximately $5.6 million was recorded as goodwill and is being
amortized on a straight-line basis over 10 years. We will amortize the fiber
optic rights on a straight-line basis over 20 years.
Slip.Net
On January 7, 1999, we purchased all of the outstanding capital stock of
Accelerated Information, Inc., the parent company of Slip.Net, Inc., an
Internet service company providing Internet access, web hosting services, e-
commerce solutions and co-location services, primarily in the San Francisco
Bay Area. The purchase price consisted of approximately $10.5 million in cash
and 187,500 shares of our Series B common stock. We accounted for the
acquisition under the purchase method of accounting. Approximately $10.9
million was recorded as goodwill and is being amortized on a straight-line
basis over three years.
Sirius
On March 2, 1999, we purchased all of the outstanding capital stock of
Sirius Solutions, Inc., d/b/a Sirius Connections, an Internet service company
providing Internet access, web hosting services, e-commerce solutions and co-
location services, primarily in the San Francisco Bay Area. The purchase price
consisted of approximately $7.5 million in cash and 285,000 shares of our
Series B common stock. We accounted for the acquisition under the purchase
method of accounting. Approximately $8.6 million was recorded as goodwill and
is being amortized on a straight-line basis over three years.
Hypercon
On June 1, 1999, we purchased all of the outstanding capital stock of
Hypercon, Inc., an Internet service company providing Internet access, web
hosting services, e-commerce solutions and co-location services in the Houston
metropolitan area. The purchase price consisted of approximately $2.0 million
in cash and 49,993 shares of our Series B common stock. Subsequent to the
acquisition, we repaid approximately $215,000 in debt. We accounted for the
acquisition under the purchase method of accounting. The total consideration
of cash, stock and assumption of net liabilities was approximately $2.8
million. Approximately $2.8 million was recorded as goodwill and is being
amortized on a straight-line basis over three years.
Internet Express
On June 14, 1999, we purchased all of the outstanding membership interests
of Internet Express, LLC, an Internet service company providing Internet
access and web hosting services in the Denver/Front Range metropolitan area,
including Colorado Springs and Fort Collins. The purchase price consisted of
approximately $1.0 million in cash and 30,000 shares of our Series B common
stock. Subsequent to the acquisition, we repaid approximately $959,000 in
various liabilities of Internet Express, LLC. We accounted for the acquisition
under the purchase method of accounting. The total consideration of cash,
stock and assumption of certain net liabilities was approximately $2.2
million. Approximately $2.2 million was recorded as goodwill and is being
amortized on a straight-line basis over three years.
30
<PAGE>
inQuo
On June 22, 1999, we purchased all of the outstanding capital stock of
inQuo, Inc., an Internet service company providing dedicated Internet access
in the Salt Lake City metropolitan area. The purchase price was approximately
$844,000 of cash. We accounted for the acquisition under the purchase method
of accounting. The total consideration of cash and acquired net liabilities of
approximately $150,000 resulted in total consideration of approximately $1.0
million, which we recorded as goodwill and is being amortized on a straight-
line basis over three years.
Transport Logic
On July 7, 1999, we acquired all of the outstanding capital stock of Oregon
Professional Services, Inc., d/b/a Transport Logic, Inc., an Internet service
company providing Internet access, web hosting services, e-commerce solutions
and co-location services in the western and northwestern United States. The
purchase price consisted of approximately $7.2 million in cash and 392,935
shares of our Series B common stock. We accounted for the acquisition under
the purchase method of accounting. The total consideration of cash, stock and
assumption of certain liabilities of approximately $1.0 million resulted in
consideration of $10.5 million, which we recorded as goodwill and is being
amoritzed on a straight-line basis over three years.
Intelenet
On July 14, 1999, we purchased all of the outstanding capital stock of
Intelenet Communications, Inc., an Internet service company providing advanced
connectivity, data center services and networking consulting in Southern
California. The purchase price consisted of approximately $16.0 million in
cash and 875,000 shares of our Series B common stock. We accounted for the
acquisition under the purchase method of accounting. Approximately $20.2
million was recorded as goodwill and is being amortized on a straight-line
basis over three years.
Revenue
We derive revenue from three primary product categories: Internet services,
web integration and consulting services and telephony services.
Internet Services
Internet services revenue is derived from providing high-speed Internet
access, such as dedicated access and DSL, web hosting services, e-commerce
solutions, data center co-location services and dial up access. We first
generated revenue from providing Internet services in December of 1998.
Dial-up Internet access customers pay fixed monthly charges. High-speed
Internet access customers, including dedicated access and DSL customers, when
market conditions permit, pay us a one-time set-up fee and thereafter, fixed
monthly charges. These charges vary depending on the type of service, the
length of contract and local market conditions. High-speed Internet access
customers typically sign a contract for a one year initial service period
which becomes a month-to-month contract thereafter. These contracts may be
terminated at any time; however, our customers generally remain obligated to
pay for the initial contract period if they terminate within that period.
For web hosting services, we typically charge a flat rate fee for shared
and dedicated web hosting services based on the customer's server and network
capacity requirements. We also typically charge a one-time set-up fee.
Additionally, we charge customers recurring fees based on the amount of data
transmitted. We also receive fees for additional services provided to
customers, such as remote monitoring and management and providing information
on their site performance.
31
<PAGE>
We offer several categories of e-commerce solutions with varying price and
feature categories. Our customers generally pay a flat monthly fee depending
on the number of features they require. We give our customers the ability to
create custom web sites, utilizing our application platform, which we
generally price on a per-hour basis.
Data center services revenue is derived from customers co-locating their
file servers and equipment within our facilities. The fee paid by a customer
is primarily based on the amount of space required to house their equipment
and the related Internet connectivity.
Revenue for all services is recognized as the service is provided. Amounts
billed relating to future periods are recorded as deferred revenue and are
recognized as revenue as services are rendered. To encourage potential
customers to adopt our services, we sometimes offer reduced prices for an
initial period. Internet services revenue is primarily affected by the number
of customers, price and service competition. Prices for these services have
been falling and we expect prices to continue to fall.
Web Integration and Consulting Services
Web integration and consulting services revenue is derived from network
consulting, design, integration and equipment sales. Revenues are recognized
under the percentage-of-completion method of accounting based upon the ratio
that costs incurred bear to the total estimated costs for each contract. Web
integration and consulting services revenue is primarily affected by the
number of customers, price and service competition, price of equipment,
product offering and timing of sales. While we believe that offering web
integration and consulting services will provide us with access to a broader
customer base, we expect this revenue to decrease as a percentage of total
revenue in the future as we grow our data service offerings.
Telephony Services
Telephony services revenue is generated from local, long distance and other
telephone services. We currently provide telephony services in the Los Angeles
metropolitan market. We are installing switching equipment in the San
Francisco Bay Area and in San Diego and expect to begin offering telephony
services to customers in these markets during the second quarter of 2000. We
generate telephony services revenue by replacing the basic telephony services
currently provided by incumbent local exchange carriers, interexchange
carriers and competitive local exchange carriers, including local, long
distance and other telephony services.
We recognize telephony services revenue in the month services are provided.
Amounts billed relating to future periods are recorded as deferred revenue and
are recognized as revenue as services are rendered. Telephony services revenue
is primarily affected by number of customers, price and service competition.
Prices for these services have been falling and we expect prices to continue
to fall. While we believe that offering telephony services will provide us
with access to a broader customer base, we expect telephony revenue to
decrease as a percentage of total revenue in the future as we grow our data
service offerings.
Costs and Expenses
Network and Service Costs
Network and service costs include a variety of service and network
operations costs. Network costs consist of payments to other communications
carriers and DSL wholesalers for monthly recurring and non-recurring
communications line charges incurred to provide DSL, integrated services
digital network, frame relay and telephony services as well as backbone
transport charges. Service costs include labor and materials associated with
web integration and consulting services. Network and service operations costs
include rent and utilities associated with co-locations, points of presence
and network operations centers. We currently enter into operating leases for a
significant portion of our infrastructure and we expect this practice to
continue as we enter into new markets. Labor associated with line repair and
maintenance is also included in network and service costs.
32
<PAGE>
Selling, General and Administrative
Our selling, general and administrative, or SG&A, expenses consist of costs
related to selling, marketing, customer care, provisioning, billing and
collections, information technology, general management and overhead and other
administrative expenses. We expect that SG&A expenses will increase
significantly in the future as we expand operations into new markets and grow
our sales and marketing staff.
Depreciation and Amortization
Depreciation and amortization expenses include charges relating to
depreciation of property and equipment, which consists principally of network
infrastructure, communications equipment, buildings and leasehold
improvements, furniture and equipment, and amortization of intangibles,
including goodwill. We depreciate our assets and network infrastructure on a
straight-line basis over the estimated useful life of each asset. Estimated
useful lives for our assets currently range from three to 20 years. In
addition, we have recorded goodwill in connection with our acquisitions, which
we will amortize over a period generally expected to be three years, with the
exception of goodwill associated with the acquisition of Optec, which is being
amortized over 10 years.
Interest
Interest expense consists of interest expense associated with our debt. We
incurred minimal interest expense prior to 1997. Interest expense during the
fiscal year ended September 30, 1997 was primarily related to a revolving
credit facility that we terminated on April 13, 1998. On April 13, 1998, we
completed the issuance of our senior notes. Interest expense subsequent to
this date primarily relates to our senior notes and capital leases. We are not
currently scheduled to make any cash interest payments on our senior notes
until the year 2003.
Prior to 1998, interest income was minimal. Interest income during 1998 and
subsequent to 1998 primarily represents interest earned on our investments in
high-grade, short-term marketable securities and cash equivalents. Marketable
securities consist of commercial paper with original maturities greater than
three months but less than six months. Cash equivalents consist of money
market instruments, commercial paper and government agency issues with
maturities less than three months. We have classified our marketable
securities as held-to-maturity, as we have the intent and ability to hold
these securities to maturity.
Results of Operations
Nine Months Ended September 30, 1999 Compared with Nine Months Ended
September 30, 1998
Revenues
Total revenues increased from $977,000 for the nine months ended September
30, 1998 to $36.5 million, an increase of $35.5 million. The increase was
primarily a result of increases in the aggregate number of our data
communications customers. These customers were acquired as a result of our
acquisitions of Optec, Slip.Net, Sirius, Hypercon, Internet Express, inQuo,
Transport Logic and Intelenet. The remaining increase was due to the continued
expansion of our customer base in the Los Angeles metropolitan area.
Internet services. Internet services revenue was $13.2 million for the nine
months ended September 30, 1999. There were no revenues for Internet services
during the nine months ended September 30, 1998. Internet services revenue
associated with our acquisitions was $11.6 million for the nine months ended
September 30, 1999. The remaining increase is due to the provision of data
services to our customer base in the Los Angeles metropolitan area.
Web integration and consulting services. Web integration and consulting
services revenue was $20.0 million for the nine months ended September 30,
1999. The Company had no web integration and consulting services revenue
during the nine months ended September 30, 1998. Optec generated approximately
33
<PAGE>
$18.2 million of web integration and consulting revenue during the nine months
ended September 30, 1999. The remaining increase is due to expansion of our
customer base in the Los Angeles metropolitan area.
Telephony services. Telephony services increased from $977,000 for the nine
months ended September 30, 1998 to $3.2 million for the nine months ended
September 30, 1999, an increase of $2.3 million. This increase is due to the
continued market penetration and expansion of our customer base in the Los
Angeles metropolitan area.
Operating Expenses
Network and service costs. Network and service costs increased from
$885,000 for the nine months ended September 30, 1998 to $25.8 million for the
nine months ended September 30, 1999, an increase of $24.9 million. Our
acquisitions and the support of the customers acquired in those acquisitions
increased network and service costs in aggregate by approximately $18.9
million for the nine months ended September 30, 1999. The remaining increase
is due to the cost of providing service to our expanded customer base in the
Los Angeles metropolitan area.
Selling, general and administrative. SG&A expenses increased from $13.9
million for the nine months ended September 30, 1998 to $46.0 million for the
nine months ended September 30, 1999, an increase of $32.1 million. The SG&A
of acquired businesses increased our SG&A by an aggregate of approximately
$12.5 million for the nine months ended September 30, 1999. Salaries and other
related expenses, excluding the acquisitions, increased approximately $10.6
million for the nine months ended September 30, 1999, primarily due to higher
staffing levels at our headquarters and increased sales and marketing costs.
In addition, as further discussed in Note 12 to the financial statements for
the nine months ended September 30, 1999, in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 79, we recorded a capital
contribution and corresponding non-cash charge during the nine months ended
September 30, 1999 in the amount of $1.9 million. The remaining increase was
due to higher overall expenses resulting from expansion of operations in
accordance with the execution of our business plan.
Depreciation and amortization. Depreciation and amortization expenses
increased from $1.9 million for the nine months ended September 30, 1998 to
$14.9 million for the nine months ended September 30, 1999, an increase of
$13.0 million. The majority of the increase in depreciation and amortization
is due to the amortization of goodwill associated with the our various
acquisitions. Amortization of the goodwill associated with these acquisitions
approximated $8.0 million for the nine months ended September 30, 1999. The
remaining increase related primarily to depreciation associated with
communications equipment placed in service.
Other
Interest income. Interest income decreased from $6.7 million for the nine
months ended September 30, 1998 to $5.9 million for the nine months ended
September 30, 1999, a decrease of $813,000. In April 1998, the Company
completed a debt offering of senior notes raising approximately $250.0 million
in proceeds. As of September 30, 1999, the Company had approximately $88.7
million in cash and marketable securities, a decline of approximately $148.9
million in cash and marketable securities compared to the same prior year
period, this decrease resulted in lower interest income.
Interest expense. Interest expense increased from $15.5 million for the
nine months ended September 30, 1998 to $28.1 million for the nine months
ended September 30, 1999, an increase of $12.6 million. This increase relates
primarily to interest expense associated with the senior notes, partially
offset by a reduction in interest expense associated with a revolving credit
facility, which was terminated in April 1998. The Company is not currently
scheduled to make any cash interest payments on the senior notes until the
year 2003. Capitalized interest for the nine months ended September 30, 1999
and 1998 was $405,000 and $450,000, respectively.
34
<PAGE>
Extraordinary loss. An extraordinary loss on the extinguishment of debt of
$4.7 million was recorded in the nine months ended September 30, 1998. The
Company reported no extraordinary loss in the nine months ended September 30,
1999. On September 16, 1997, the Company entered into a revolving credit
facility with a syndicate of lenders to provide financing for the construction
of telecommunication networks and for general working capital purposes. The
Company terminated the credit facility concurrently with the closing of the
senior notes and paid the syndicate of lenders a $1.0 million termination fee
pursuant to the terms thereof. The Company recorded an extraordinary loss of
approximately $4.7 million associated with such debt extinguishment in the
nine months ended September 30, 1998. This loss was inclusive of the
termination fee and the write-off of unamortized debt discount and deferred
financing costs.
Quarter Ended December 31, 1998 Compared With Quarter Ended December 31,
1997
Revenue
Total revenue increased from $114,000 for the quarter ended December 31,
1997 to $3.0 million for the quarter ended December 31, 1998, an increase of
$2.9 million. Our revenue increased primarily as a result of our acquisition
of Optec, which generated $2.3 million of revenue in the quarter ended
December 31, 1998.
Internet services. Internet services revenue was $123,000 for the quarter
ended December 31, 1998. We had no Internet services revenue for the quarter
ended December 31, 1997. Our Internet services revenue increased primarily as
a result of the addition of the resale of high-speed Internet access to our
product mix in the Los Angeles metropolitan market.
Web integration and consulting services. Web integration and consulting
services revenue was $2.3 million for the quarter ended December 31, 1998. We
had no web integration and consulting services revenue for the quarter ended
December 31, 1997. Our web integration and consulting services revenue related
entirely to our acquisition of Optec.
Telephony services. Telephony services increased from $114,000 for the
quarter ended December 31, 1997 to $565,000 for the quarter ended December 31,
1998, an increase of $451,000. This increase was due to market penetration and
expansion of our customer base in the Los Angeles metropolitan market.
Costs and Expenses
Network and service costs. Network and service costs increased from
$144,000 for the quarter ended December 31, 1997 to $2.7 million for the
quarter ended December 31, 1998, an increase of $2.6 million. This increase
resulted from the following factors: the acquisition of Optec, which resulted
in the addition of $1.8 million in operating costs; personnel costs associated
with the expansion of our operations and network deployment groups; and
increased operating costs relating to our expanded customer base in the Los
Angeles metropolitan market.
Selling, general and administrative. SG&A expenses increased from $2.2
million for the quarter ended December 31, 1997 to $10.8 million for the
quarter ended December 31, 1998, an increase of $8.6 million. Significant
factors contributing to the overall increase in SG&A expenses included an
increase of approximately $4.5 million in personnel costs associated with
increased staffing, executive signing bonuses and personnel bonuses; and an
increase of approximately $558,000 associated with the operations of Optec.
Depreciation and amortization. Depreciation and amortization expenses
increased from $478,000 for the quarter ended December 31, 1997 to $1.8
million for the quarter ended December 31, 1998, an increase of $1.3 million.
This increase primarily related to depreciation expense associated with new
equipment purchases for our central office in Orange County, California. Also,
during the quarter ended December 31, 1998, we recorded a charge of
approximately $328,000 related to the write-down of certain unused
telecommunications equipment.
35
<PAGE>
Other
Interest income. Interest income increased from $7,000 for the quarter
ended December 31, 1997 to $3.2 million for the quarter ended December 31,
1998. The increase in interest income is primarily attributable to the
investment of the net proceeds from the sale of our outstanding senior notes.
Interest expense. Interest expense increased from $1.3 million for the
quarter ended December 31, 1997 to $8.6 million for the quarter ended December
31, 1998, an increase of $7.3 million. The increase in interest expense
related primarily to additional interest expense associated with our
outstanding senior notes, partially offset by a reduction in interest expense
associated with a revolving credit facility which was terminated in April
1998. During the quarter ended December 31, 1998, interest costs of $333,000
were capitalized. No interest was capitalized for the quarter ended December
31, 1997.
Year Ended September 30, 1998 Compared With Year Ended September 30, 1997
Revenue
Telephony services. Telephony services revenue increased from $171,000 for
the fiscal year ended September 30, 1997 to $1.1 million for the fiscal year
ended September 30, 1998, an increase of $929,000. Telephony services revenue
increased as a result of our Orange County network being operational for a
full year. This network began servicing customers in August 1997. Prior to the
commencement of operations of the Orange County network, telephony services
revenue consisted principally of reimbursable engineering, design and
construction costs associated with the design of fiber optic communications
networks and royalties from the license of a patent for fiber optic
connectors. We did not generate revenue from any other source during this
period.
Costs and Expenses
Network and service costs. Network and service costs increased from
$474,000 for the fiscal year ended September 30, 1997 to $1.0 million for the
fiscal year ended September 30, 1998, an increase of $565,000. This increase
was principally due to increased personnel costs associated with operating and
deploying our Orange County operations.
Selling, general and administrative. SG&A expenses increased from $7.4
million for the fiscal year ended September 30, 1997 to $16.1 million for the
fiscal year ended September 30, 1998, an increase of $8.7 million. The
increase primarily resulted from the commencement of operations of our
communications network in the Los Angeles metropolitan market. The increase
also resulted in part from our management consulting obligations with an
entity controlled by Donald L. Sturm and with Enron, pursuant to which we
incurred costs aggregating $840,000 for the year ended September 30, 1998. See
"Certain Transactions."
Depreciation and amortization. Depreciation and amortization expenses
increased from $501,000 for the fiscal year ended September 30, 1997 to $2.4
million for the fiscal year ended September 30, 1998, an increase of $1.9
million. This increase primarily related to depreciation expense associated
with equipment purchased for our central office in Orange County as well as
the built and leased elements of our fiber optic network and office and other
equipment associated with our general operations.
Other
Interest income. Interest income increased from $149,000 for the fiscal
year ended September 30, 1997 to $6.7 million for the fiscal year ended
September 30, 1998, an increase of $6.6 million. The increase in interest
income was primarily attributable to the investment of the net proceeds from
the sale of our outstanding senior notes.
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<PAGE>
Interest expense. Interest expense increased from $1.4 million for the
fiscal year ended September 30, 1997 to $16.9 million for the fiscal year
ended September 30, 1998, an increase of $15.5 million. The increase in
interest expense related primarily to additional interest expense associated
with our outstanding senior notes, partially offset by a reduction in interest
expense associated with a revolving credit facility that was terminated in
April 1998. Interest expense incurred during fiscal 1998 and fiscal 1997 was
offset by approximately $450,000 and $52,000, respectively, of capitalized
interest.
Year Ended September 30, 1997 Compared With Year Ended September 30, 1996
Revenue
Telephony services. Telephony services revenue decreased from $354,000 in
the fiscal year ended September 30, 1996 to $171,000 in the fiscal year ended
September 30, 1997, a decrease of $183,000. This decrease reflects the
transition from performing engineering and consulting contracts to developing
a communications network. During the fiscal year ended September 30, 1997, we
stopped bidding on new engineering contracts in order to focus on designing
and constructing our communications network in Orange County.
Costs and Expenses
Network and service costs. Network and service costs increased from
$247,000 in the fiscal year ended September 30, 1996 to $474,000 in the fiscal
year ended September 30, 1997, an increase of $227,000. This increase was
principally comprised of increased personnel costs in the operations and
engineering groups, increased operating costs for the Orange County central
office and costs for materials and equipment needed to finish an engineering
project started in 1996.
Selling, general and administrative. SG&A expenses increased from $3.9
million in the fiscal year ended September 30, 1996 to $7.4 million in the
fiscal year ended September 30, 1997, an increase of $3.5 million. This
increase was principally due to increased costs of sales, marketing and
administrative personnel and an increase in administration expense related to
overhead associated with the Orange County central office.
Depreciation and amortization. Depreciation and amortization expenses
increased from $75,000 in the fiscal year ended September 30, 1996 to $501,000
in the fiscal year ended September 30, 1997, an increase of $426,000. This
increase consists principally of depreciation expense related to the Orange
County central office, the fiber optic network that we placed into service
during 1997 and depreciation related to office and other equipment associated
with general operations.
Other
Interest income. Interest income increased from $9,000 in the fiscal year
ended September 30, 1996 to $149,000 in the fiscal year ended September 30,
1997, an increase of $140,000. The increase in interest income was a result of
an increase in funds available for short-term investment as a result of
amounts raised from sales of preferred stock in January 1997.
Interest expense. Interest expense increased from $27,000 in the fiscal
year ended September 30, 1996 to $1.4 million in the fiscal year ended
September 30, 1997. Interest expense of $997,000 related to a capital lease
with the City of Anaheim. The remaining balance of the increase primarily
related to interest expense under the credit facility and other short-term
loans and interest expense associated with our capital leases.
Quarterly Results of Operations
The following table sets forth certain unaudited consolidated statements of
operations data for our most recent eight quarters. This information has been
derived from our unaudited consolidated financial statements. In our
management's opinion, this unaudited information has been prepared on the same
basis as the audited annual
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consolidated financial statements and includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results of operations for the quarters presented. This information should be
read in conjunction with the audited consolidated financial statements and the
related notes included elsewhere in this prospectus. The operating results for
any quarter are not necessarily indicative of results for any future period.
Certain prior period amounts have been reclassified to conform to the 1999
basis of presentation.
<TABLE>
<CAPTION>
Dec. 31 Mar. 31 June 30 Sep. 30 Dec. 31 Mar. 31 June 30 Sep. 30
1997 1998 1998 1998 1998 1999 1999 1999
------- ------- -------- ------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet services...... $ -- $ -- $ -- $ -- $ 123 $ 2,412 $ 3,865 $ 6,926
Web integration and
consulting services... -- -- -- -- 2,285 5,207 7,124 7,682
Telephony services..... 114 130 416 431 565 643 1,189 1,414
------- ------- -------- ------- -------- -------- -------- --------
Total revenue........ 114 130 416 431 2,973 8,262 12,178 16,022
------- ------- -------- ------- -------- -------- -------- --------
Costs and expenses:
Network and service
costs................. 144 192 247 446 2,707 5,696 8,886 11,194
Selling, general and
administrative........ 2,248 2,525 4,898 6,442 10,812 10,912 13,723 21,320
Depreciation and
amortization.......... 478 551 811 585 1,812 2,989 4,325 7,610
------- ------- -------- ------- -------- -------- -------- --------
Total costs and
expenses............ 2,870 3,268 5,956 7,473 15,331 19,597 26,934 40,124
------- ------- -------- ------- -------- -------- -------- --------
Loss from operations.... (2,756) (3,138) (5,540) (7,042) (12,358) (11,335) (14,756) (24,102)
Other income (expense):
Interest income........ 7 49 3,191 3,502 3,227 2,401 2,047 1,481
Interest expense....... (1,349) (1,131) (8,592) (5,826) (8,600) (8,830) (9,698) (9,597)
------- ------- -------- ------- -------- -------- -------- --------
Total other expense.. (1,342) (1,082) (5,401) (2,324) (5,373) (6,429) (7,651) (8,116)
------- ------- -------- ------- -------- -------- -------- --------
Loss before
extraordinary item..... (4,098) (4,220) (10,941) (9,366) (17,731) (17,764) (22,407) (32,218)
Extraordinary item--
extinguishment of
debt................... -- -- (4,731) -- -- -- -- --
------- ------- -------- ------- -------- -------- -------- --------
Net loss................ $(4,098) $(4,220) $(15,672) $(9,366) $(17,731) $(17,764) $(22,407) $(32,218)
======= ======= ======== ======= ======== ======== ======== ========
</TABLE>
We could experience quarterly variations in revenue and operating income as
a result of many factors, including:
. changes in our revenue mix among our various service offerings;
. the introduction of new services by us;
. actions taken by competitors;
. the timing of the acquisition or loss of customers; and
. the timing of additional SG&A expenses incurred to acquire and support
new or additional business.
Liquidity and Capital Resources
Our existing operations have required and will continue to require
substantial capital investment for the installation of communications
equipment, DSL equipment, data center facilities, incumbent local exchange
carrier co-locations, fiber optics and other electronics and related
equipment. In addition, we expect to incur operating losses for at least
several years. Such expansion will require significant additional capital for
the design, development and construction of our network, business acquisitions
and the funding of operating losses as a result of expanding the network into
new markets.
To date, we have satisfied our cash requirements through the private
placements of debt and equity securities. From our inception through September
30, 1999, we raised approximately $62.6 million in net proceeds from the sale
of equity securities and $241.8 million in net proceeds from the sale of debt
securities.
On December 30, 1997, we consummated a private placement of our Series A
common stock to an entity controlled by Donald L. Sturm and Enron. Aggregate
proceeds from this offering totaled approximately $26.5
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million, net of offering commissions and certain other advisory fees, and were
received on January 6, 1998. On April 13, 1998, concurrent with our senior
notes offering discussed below, we completed an additional $18.8 million, net
of offering commissions and other fees, private placement of capital stock to
an entity controlled by Donald L. Sturm and Enron. In addition, we have raised
approximately $16.2 million, net of offering commission and other fees, from
the issuance of Series A, B and C preferred stock and $1.1 million from the
exercise of options to purchase our Series B common stock. All shares of
preferred stock have subsequently been converted to Series B common stock.
On April 13, 1998, we completed an offering of senior notes pursuant to
Rule 144A under the Securities Act of 1933. In this debt offering, we sold
470,000 units consisting of 13% Senior Discount Notes due 2008 and warrants to
purchase, at $.01 per share, an aggregate of 3,713,094 shares of our Series B
common stock. The aggregate net proceeds of the debt offering was $241.8
million.
On December 2, 1999, we entered into an equity investment agreement with
Spectra 4, LLC, an entity controlled by Donald L. Sturm, for a $50.0 million
equity commitment. This agreement allows us to require that Spectra 4 purchase
up to $50.0 million of Series B common stock priced at $7.50 per share. The
agreement expires on June 19, 2000, or upon the closing of this offering.
The equity investment agreement contains three dates on which we can
require Spectra 4 to purchase our Series B common stock. These dates are:
February 15, 2000; March 31, 2000; and the expiration date of the Agreement.
Additionally, if our cash, cash equivalents and marketable securities position
is $20.0 million or less, we will automatically exercise $25.0 million of the
commitment. Under the terms of the Sturm equity investment agreement, we have
agreed to pay Spectra 4 a non-refundable $5.0 million commitment fee not later
than the closing of this offering.
As of September 30, 1999, we had $88.7 million of cash, cash equivalents
and marketable securities. We had an accumulated deficit of $138.2 million at
September 30, 1999.
For the nine months ended September 30, 1999 and the three months ended
December 31, 1998, capital expenditures were $42.8 million and $15.5 million,
respectively. For the year ended September 30, 1998, capital expenditures were
$26.1 million. In addition, we had expenditures related to acquisitions of
$45.4 million and $22.3 million for the nine months ended September 30, 1999
and the three months ended December 31, 1998, respectively.
We believe that the net proceeds of this offering, together with the
proceeds of the 1999 equity investment agreement with an entity controlled by
Donald L. Sturm, our existing cash, cash equivalents and marketable
securities, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. Thereafter,
we may require additional funds to support our working capital and capital
expenditure requirements and may seek to raise additional funds through public
or private equity or debt financing or other sources for such requirements and
acquisitions of technologies, companies and development of our existing and
new services. Any additional financing we may need may not be available on
terms favorable to us, or at all.
Our sources and uses of funds were as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Nine Months Ended
September 30, Ended September 30,
------------------- December 31, -------------------
1997 1998 1998 1998 1999
-------- --------- ------------ --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided (used)
by operating
activities............. $ (7,446) $ (10,133) $ 134 $ (9,066) $(22,477)
Net cash provided (used)
by investing
activities............. (12,647) (191,659) (42,264) (189,169) 51,948
Net cash provided (used)
by financing
activities ............ 20,557 273,295 (250) 270,004 (968)
</TABLE>
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<PAGE>
Net cash used in operations for the nine month periods ended September 30,
1999 and 1998 and the fiscal years ended September 30, 1998 and 1997 were
primarily due to net operating losses, offset in part by, non-cash items,
consisting mainly of depreciation and amortization. Cash provided by
operations for the three months ended December 31, 1998 was primarily due to
non-cash items, consisting mainly of depreciation and amortization, and an
increase in accounts payable.
Net cash provided by investing activities for the nine months ended
September 30, 1999 was primarily a result of the sale of short-term
investments, partially offset by the purchase of short-term investments,
acquisitions and capital expenditures. The cash used by investing activities
for the nine months ended September 30, 1998 was the result of the purchase of
short-term investments and capital expenditures. Net cash used by investing
activities for the three months ended December 31, 1998 was primarily the
result of acquisitions and capital expenditures. Net cash used by investing
activities for the fiscal year ended September 30, 1998 was primarily a result
of the purchase of short-term investments and capital expenditures partially
offset by the sale of short-term investments. Net cash used by investing
activities for the year ended September 30, 1997 was primarily a result of our
capital expenditures.
Net cash used by financing activities for the nine months ended September
30, 1999 was primarily a result of the repayment of debt assumed in our
acquisitions, partially offset by proceeds from the exercise of stock options
and warrants. Net cash provided by financing activities for the nine months
ended September 30, 1998, resulted from the issuance of the senior notes and
proceeds from the sale of Series A and B common stock, partially offset by
revolving credit facility repayments. Net cash provided by financing
activities for the year ended September 30, 1998 was primarily due to proceeds
from the issuance of our outstanding senior notes. Net cash provided by
financing activities for the year ended September 30, 1997 was primarily due
to proceeds from the issuance of equity securities and borrowings under a
credit facility.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to fluctuations in interest rates and market value of our
investments. Our exposure to fluctuations in interest rates and market values
of our investments relates primarily to our short-term investment portfolio,
which is included in cash and cash equivalents and marketable securities. We
have not used derivative financial instruments in our investment portfolio. We
invest our excess cash in high-grade commercial paper, money market
instruments and government agency issues and we limit the amount of credit
exposure to any one issuer. Due to the short-term nature of our investments,
the impact of interest rate changes would not be expected to have a
significant impact on the value of these investments. The effect of interest
rate and investment risk on us has not been significant.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Because of this, our
future investment income may fall short of expectations due to changes in
interest rates or we may suffer losses in principal if we are forced to sell
securities that have declined in market value due to changes in interest
rates.
Management believes that the carrying amounts shown for our financial
instruments reasonably approximate their fair values.
Year 2000 Readiness Disclosure
Compliance Program Overview
All references to Year 2000 within this prospectus are provided as "Year
2000 Statements" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
We have a comprehensive internal Year 2000 compliance program designed to
enable us to continue our business without interruption as we move into the
next millennium. We established our Year 2000 compliance program to address
the impact of the Year 2000 date transition on our operations, pursuant to the
act.
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<PAGE>
This program covers not only our internal information systems and other
information technology facilities such as data and telephony communications,
building management, and security systems, but also the readiness and
compliance programs of our key suppliers.
In 1998, we established a dedicated Year 2000 Project Team, consisting of
subject matter experts from relevant departments within FirstWorld. A project
manager coordinates existing projects and oversees management and execution of
our Year 2000 compliance program. Our Chief Information Officer has ultimate
responsibility for the Year 2000 compliance program, and he communicates Year
2000 progress weekly to our senior management, and monthly to our Board of
Directors.
Policies, procedures, and standard approaches for assessing and resolving
issues and managing compliance have been adapted from both internal and
external sources.
State of Year 2000 Readiness
We have adopted the California Public Utilities Commission's definition of
"Year 2000 Ready" and of "Year 2000 Compliant." Our Year 2000 compliance
program covers several phases, including:
. taking inventory of hardware, software, third party suppliers and
embedded systems;
. assessing business and customer risks associated with these systems or
suppliers and creating, executing and monitoring action plans to address
known risks;
. taking appropriate remedial action; and
. establishing and implementing contingency plans and procedures.
We are continually monitoring new hardware, software and embedded systems
introduced into our environment that could be affected by potential Year 2000
issues. We continue to update our inventory as our business grows. We use this
inventory and the information we derive from it to drive our internal Year
2000 efforts. Action plans generally consist of:
. assessing the Year 2000 readiness of systems;
. repairing, replacing, or retiring systems that are not Year 2000 Ready;
and
. testing repaired or replaced components and systems where possible.
Our Year 2000 compliance program encompasses information technology
hardware and software systems such as communications systems, desktop PCs, and
custom-built software programs, as well as systems with embedded technology,
such as power generators, temperature controls, alarms, security systems and
elevators.
We have segregated our systems and applications and their corresponding
Year 2000 readiness risk into the following five categories:
. internal information technology enterprise applications, such as billing
and customer service;
. network infrastructure, including corporate local- and wide area
networks, user workstations and off-the-shelf software applications;
. customer Internet service provider platform;
. customer telephony platform; and
. corporate facilities, such as offices, phone systems and voice mail.
We are using a variety of software tools to assist us in evaluating our
Year 2000 readiness. Where possible, we test our critical applications. These
tests include transaction processing at various dates before, during and after
the millennium, including the leap day in February 2000. While we do not
anticipate that the Year 2000
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<PAGE>
will cause disruption in our ability to provide services, there can be no
assurance that all systems, processes and platforms will be Year 2000 ready
given our significant reliance on third-party systems and providers.
Since we implemented our Year 2000 compliance program, we acquired a number
of companies and business operations and intend to continue to make
acquisitions from time to time. As a part of our due diligence prior to
closing these acquisitions, we make a preliminary assessment of the state of
each acquired business' Year 2000 readiness. After closing, we evaluate the
systems and/or applications of the acquired company as part of our Year 2000
compliance program. The evaluation of these companies and any required
remediation is substantially complete. Although we can give no assurance, we
currently expect that each of our recently acquired companies will be Year
2000 ready prior to the century date change.
Our Year 2000 compliance program also addresses third party vendors.
Certain third party services or products are critical to our continued day-to-
day operations. These third parties include power and other utilities, switch
vendors, network providers, including both local and long-haul carriers, and
other hardware and software vendors.
Most of our third party vendors are large, national companies, providing
services similar to those provided to many other similar customers. We have no
control over these companies' Year 2000 state-of-readiness. Indeed, if some of
these companies experience Year 2000 difficulties in their systems, it will
not only affect us but whole geographic regions of their customers. For
example, if an incumbent local exchange carrier loses its switching or
transmission platform, we, as well as virtually all of our competitors in that
region, will be impacted.
To mitigate this risk, we have assessed our vulnerability to unexpected
business interruptions due to the failure of third parties to remediate Year
2000 readiness issues. In connection with this assessment, we conducted an
extensive review of product Year 2000 compliance information on vendor
supplied items and services available online, in vendor literature and through
trade group resources and generally have executed vendor prescribed
methodologies, where applicable, to make these items Year 2000 Compliant. We
have collected and cataloged relevant vendor information regarding our
vendors' Year 2000 compliance and matched it against our system inventory. We
continue to review that information for updates. We maintain documentation of
assessments that have been performed by such vendors or outside sources. We
are relying on such information to accurately describe the state of Year 2000
readiness of third party products or components so assessed. We have sent and
continue to send Year 2000 compliance questionnaires and letters to our
significant third party business partners, suppliers and vendors, where we
have been unable to match compliance documentation with our utilized hardware,
software and network services, requesting that they certify their Year 2000
readiness. We are in the process of re-contacting our critical suppliers and
vendors who have not responded adequately to our requests for proof of
certification. We have substantially completed this process and continue to
follow-up on unresolved issues. There can be no assurance that the third party
information upon which we have relied is accurate or that third parties who
have responded, or will respond, to our request regarding their Year 2000
readiness have responded, or will respond, accurately or satisfactorily or
that anticipated Year 2000 actions set forth in their responses will be
properly conducted.
Since we implemented our Year 2000 compliance program, we have established
many new contractual relationships for services, including carrier agreements,
software and hardware platform purchases and upgrades. Where appropriate, we
have required the vendors to address their Year 2000 readiness as part of the
contract or service agreement.
We believe most hardware components and systems now available are Year 2000
Compliant. However, it is currently expected that manufacturers and vendors
will continue to produce patches until the end of the year. Any such patches
will be installed when they become available. However, there can be no
assurance that such patches will be made available to us for timely
installation prior to the century date change.
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We presently expect to continue extensive monitoring of our Year 2000
compliance program throughout the remainder of 1999. The current status of our
Year 2000 readiness efforts is as follows:
. inventory is essentially complete;
. assessment and planning are essentially complete;
. remediation is substantially complete; however, there are currently
isolated noncompliant services and components that for product
standardization purposes are being moved to Year 2000 compliant systems.
Contingency plans are in place if migration is not completed by year end;
and
. contingency planning is substantially complete.
We are continually monitoring new hardware, software and embedded systems
introduced into our environment that could be affected by potential Year 2000
issues.
Risks Associated with Year 2000 Issues
A significant amount of the demand we have experienced in recent months for
our products and services may have been generated by our continuing
acquisition and expansion strategy during 1999. The acquisition of a company
or customer that has failed to address its Year 2000 issues could have a
material adverse effect on our own Year 2000 efforts. To minimize the risk
associated with these acquisitions, we have instituted certain guidelines that
include Year 2000 readiness as a crucial due diligence factor. In addition, as
the Year 2000 approaches, customers may slow down Internet and telephony
systems purchases as they devote more time to preparing and testing their
systems for Year 2000 readiness, versus evaluating and implementing new
systems. Thus, the data and telecommunications industry and FirstWorld may
experience a significant deceleration from the strong annual growth rates
historically experienced in the telecommunications marketplace.
Based on the information currently available, we currently anticipate that
our products and services will be Year 2000 Compliant in all material aspects.
There can be no assurances, however, that our current products and services do
not contain undetected Year 2000 defects. The most reasonably likely worst
case scenarios would include the partial failure of a widely-sold product and
service of ours that is of mission-critical importance to our customers. Such
a scenario could expose us to litigation that could have a material adverse
impact on us. Some commentators have stated that a significant amount of
litigation will arise out of Year 2000 compliance issues. However, because of
the unprecedented nature of such litigation, it is uncertain to what extent we
could be affected by it. We currently do not believe that we will incur any
material costs or experience material disruptions in our business associated
with preparing our internal systems for the Year 2000. There can be no
assurances however, that we will not experience serious unanticipated negative
consequences caused by undetected Year 2000 defects in our internal systems,
including third-party software and hardware products and services. The most
reasonably likely worst case scenarios related to such undetected Year 2000
defects would include:
. corruption of data contained in our internal information systems,
rendering the data useless unless and until it is corrected;
. failure of hardware, software, or other information technology systems to
correctly process or transmit date-sensitive data, causing an
interruption or failure of normal business operations; and
. failure of any one of a number of third party systems or interfaces, on
which we rely for our service platform, which could interfere with our
operations.
Such a scenario could have a material adverse impact on us. In addition,
there can be no assurances that we will not experience serious unanticipated
negative consequences caused by the failure of services provided by third
parties, such as electrical power, communications services, and shipping
services. Due to the impossibility of knowing what failures generally will
result from the Year 2000 date change (particularly outside of the United
States and other countries where Year 2000 remediation has progressed the
furthest), and what effects such
43
<PAGE>
failures could have on third party vendors, we are unable to assess the
likelihood of a material adverse impact on our results of operations,
liquidity or financial condition due to such Year 2000 failures. We currently
anticipate that we will experience a significant increase in calls to customer
support from customers seeking:
. Year 2000 product information;
. information on migrating from older, non-compliant products to compliant
products; and
. assistance in handling other Year 2000 issues.
We have developed a program designed to enable us to handle the expected
increase in calls. We may incur significant costs in connection with this
program. Among other things, we currently anticipate that we will be required
to reassign consultants to the customer support organization on an interim
basis, which could cause a decrease in consulting revenues. Such costs or lost
revenues cannot be estimated until sometime after year end based on the amount
of customer support required.
In connection with most of our remediation efforts, we have collected and
cataloged vendor prescribed remediation plans. We have executed the vendor
prescribed methodology and relied upon such methodology to bring our system
into Year 2000 readiness.
In many cases, our remediation efforts were performed by the vendors who
supplied the product. If our remediation efforts are not successful or are not
completed in a timely manner, the Year 2000 issue could significantly disrupt
our ability to transact business with our customers and suppliers, and could
have a material impact on our operations. Even if our remediation efforts are
successful or we complete them on time, there can be no assurance that other
companies will timely and effectively address Year 2000 issues and
successfully convert their systems with which our systems interact, or that
any such failure to address Year 2000 issues or failure to convert by another
company would not have an adverse effect on our business or operations. We
cannot estimate the potential adverse impact that may result from non-
compliance with the Year 2000 issue by the software and equipment vendors and
others with whom we conduct business.
Contingency Planning
Our services may be adversely affected by potential Year 2000 issues
because of the uncertainties involved in addressing the Year 2000 issues and
to the extent our suppliers, vendors or customers, including incumbent local
exchange carriers over whose networks we provide certain of our services, fail
to address Year 2000 issues in a timely and effective manner. Contingency
planning is therefore an important part of our Year 2000 compliance program.
We are identifying and assessing potential points of failures and the
resulting impact to the business. Our methodology includes examining risk
reduction measures as well as the development of detailed contingency plans.
We have prepared comprehensive contingency plans to address possible
failures caused by the Year 2000 date change. The contingency plans address,
among other things, access to alternative third-party vendors for services and
products, such as access and transport services, manual "work-arounds" for
software and hardware failures, and substitution of hardware and software
systems, if necessary. Our contingency planning is substantially complete. We
have addressed potential and expected effects of the Year 2000 date change by
planning for increased support staffing in late 1999 and early 2000. Such
existing plans are incorporated into the contingency plans. However, we can
not make any assurances that the contingency plans will resolve any Year 2000
failure that may occur, in a manner that is satisfactory or desirable to us.
Costs of Addressing Year 2000 Issues
We are continually upgrading and improving our information technology
systems and facilities, and we expense all incremental costs associated with
Year 2000 compliance issues as incurred. Through November 30, 1999, such costs
incurred were approximately $200,000 primarily consisting of contract
consulting fees. We
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currently expect to incur internal costs, including salaries and benefits for
two dedicated full-time equivalent employees to address Year 2000 compliance
issues; such costs represent approximately 8% of the budgeted information
technology staff.
We have not yet determined the full cost of our Year 2000 compliance
program and its related impact on our financial condition. We currently have
budgeted $500,000 for the completion of our Year 2000 program, and have
included it as part of the normal 1999 information technology operating
budget. No assurance can be made, however, as to the total cost for the Year
2000 compliance program until the program has been completed. While there can
be no assurance, we do not believe that any such additional costs will have a
material impact on our results of operations.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("SFAS
No. 131"), effective for fiscal years beginning after December 15, 1997. Under
SFAS No. 131, we will be required to present certain information about
operating segments, including profit or loss and segment assets. We have not
yet determined the impact of the adoption of this statement.
In June 1998 and June 1999, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), and SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB No. 133" ("SFAS No.
137"). We are required to adopt SFAS No. 133 and SFAS No. 137 in the year
ended December 31, 2001. These pronouncements establish methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. To date, we have not entered
into any derivative financial instruments or hedging activities.
45
<PAGE>
BUSINESS
The Company
We are a rapidly growing network-based provider of Internet, data and
communications services. Our service offerings include high-speed Internet
access, such as dedicated access and digital subscriber line, or DSL; dial-up
Internet access; web hosting and design; data center services including co-
location, access and monitoring services; e-commerce solutions; and web
integration and consulting services. To complement our data services
offerings, we also provide local and long distance telephony services in
selected markets. Our strategy is to offer our customers a single source
solution to meet the full range of their increasingly complex Internet, data
and communications needs. We primarily market our services, using a
consultative sales approach, to small- and medium-sized businesses, and also
selectively to larger businesses, wholesale customers and consumers. We
currently provide services in eight metropolitan markets and intend to expand
our market footprint to ten markets by the end of 2000.
Prior to 1998, we offered telephony and network construction services in
the Los Angeles metropolitan market. To capitalize on the growing demand for
data services, the fastest growing segment of the communications industry, we
made a strategic decision in 1998 to broaden our service offering and
emphasize data services and expand our market footprint. Since that time, we
have acquired eight companies to enhance our data service offerings and our
market presence. In November 1998, we expanded into the Portland area by
acquiring Optec, a company providing web integration services to businesses.
In early 1999, we entered the San Francisco Bay Area through the acquisition
of two Internet service providers, Slip.Net and Sirius. We continued our
market expansion with the acquisition of four Internet service providers in
June and July 1999, giving us a market presence in Houston, Denver and Salt
Lake City, and expanding our existing presence in Portland. Finally, in July
1999 we acquired Intelenet, an Irvine, California-based data center and value
added service provider with operations in the Los Angeles basin and the
Chicago metropolitan area.
We currently offer selected Internet and data services in the San
Francisco, San Diego, Portland, Denver, Houston, Salt Lake City, and Chicago
metropolitan markets and provide Internet, data and communications services in
the Los Angeles metropolitan market. We operate data centers in Glendale, San
Diego, Santa Clara, Irvine and Denver. We are in the process of expanding our
service offering in each of the markets we have entered in the last year to
include a comprehensive range of data products and services. We plan to open
data centers in each of the markets we serve and intend to expand our service
offerings into two additional metropolitan markets by the end of 2000. As of
September 30, 1999, we had approximately 71,950 active accounts, including
1,450 DSL, 1,350 dedicated access, 57,000 dial-up, 11,000 web hosting, 200 web
integration and 950 telephony accounts.
We deliver our services over a communications network that utilizes
advanced packet-switching technology and the communications protocol known as
Internet Protocol, or IP, that enables us to provide cost-effective services
to our customers. Our network combines equipment housed in our own facilities
and equipment interconnected to the incumbent local exchange carrier's central
office with redundant, high-speed connectivity to the Internet backbone. Key
components of our network architecture are our Internet data centers. These
centers house our own Internet platform, support our shared and dedicated
server hosting products and provide co-location space for our customers'
equipment.
As part of the Optec acquisition, we acquired rights to use capacity to
connect up to 15 cities on a nationwide, long-haul fiber-optic network
currently under construction by Enron. We plan to expand into selected cities
served by the Enron network as cities on this network come on-line. Enron has
advised us that capacity on this network is available in Portland, Los Angeles
and Salt Lake City. Enron is also obligated to deliver capacity to Denver,
Houston, Dallas and Miami.
We have been certified as a competitive local exchange carrier in
California, Colorado, Oregon, Texas, Washington and Utah and have an
application pending in Illinois. We plan to seek certification in additional
states as we expand our services into new markets.
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<PAGE>
In October 1998, Sheldon S. Ohringer joined FirstWorld as President and
Chief Executive Officer and the leader of a new management team. Mr. Ohringer
was formerly the President of ICG Telecom Group, Inc., the principal operating
subsidiary of ICG Communications, Inc. Since that time we have expanded our
management team significantly, adding a number of experienced data and
communications executives. Our equity sponsors include entities controlled by
Donald L. Sturm. Mr. Sturm is a private equity investor and the former Vice
Chairman of Peter Kiewit Sons' Inc. Mr. Sturm, who participated in the
decision by Peter Kiewit Sons' to invest in MFS Communications and who owns a
significant interest in Level 3 Communications, controls entities which have
invested approximately $30 million in FirstWorld. On December 2, 1999, we
entered into an equity investment agreement with an entity controlled by Mr.
Sturm under which we can require this entity to purchase up to an aggregate of
$50.0 million of Series B common stock.
Industry Overview
Data communications is the fastest growing segment of the communications
industry. The Internet, in particular, has emerged as one of the fastest
growing communications medium in history and is dramatically changing how
businesses and individuals communicate and share information. International
Data Corporation estimates that the number of Internet users worldwide will
grow from 97 million at the end of 1998 to 320 million by 2002. Forrester
Research, Inc. projects that the total market for worldwide data networking
services and Internet access will grow from $6.2 billion in 1997 to
approximately $49.7 billion by 2002, of which approximately $27.9 billion will
be from services to businesses.
The Internet's rapid growth as an essential communications medium has
created a substantial market opportunity for companies such as ours that
provide Internet, data and communications services. We believe we are well
positioned to capitalize on this opportunity due to the convergence of the
following factors:
. Growing Demand for Single Source Internet and Data Solutions. Many
companies, particularly small- and medium-sized businesses, lack the
expertise, capital or personnel required to install, maintain and monitor
their own web servers, web sites and access facilities. In addition,
these businesses must contend with the cost and complexity of retaining
multiple vendors for their data needs: Internet service providers for
Internet access and web hosting, data center companies for co-location
and data center services, and equipment integrators for network
configuration and installation. We believe that these businesses can
benefit from, and are increasingly demanding, a single source solution
for their Internet and data requirements.
. Small- and Medium-Sized Businesses Expected to Fuel Growth. We believe
that a significant portion of the growth in data communications will be
generated by small- and medium-sized businesses, which we believe have
traditionally been underserved by the larger communications providers.
Data communications, particularly through the Internet, have made it
possible for smaller companies to compete more effectively with larger
competitors by reducing their costs of communicating with employees,
customers and suppliers. eStats estimates that less than 10% of small-
sized businesses and less than 30% of medium-sized businesses currently
maintain their own web site, and that less than 15% of these businesses
in total are currently conducting sales on-line. In addition, according
to eStats, less than 25% of small-sized businesses and less than 50% of
medium-sized businesses are currently connected to the Internet.
. Emergence of Third Party Co-location Services. Internet infrastructure
and applications platforms are complex and sensitive to environmental
factors, such as temperature and power fluctuations. These factors,
together with the need for increased bandwidth, have led many businesses
to rely on third parties to house, monitor and maintain the equipment
that supports their web sites, e-commerce platforms and other business-
critical applications at secure climate controlled facilities. Housing
these platforms at third party sites also allows for easier maintenance
and operation. In addition, by locating equipment in another provider's
facility, customers can more easily increase their Internet capacity,
allowing them to scale their presence more quickly.
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<PAGE>
In addition, an increasing number of new businesses are conducting a
significant portion of their operations on the Internet. These businesses
have an expanding need for co-location space that allows them the
flexibility to rapidly add additional servers as their businesses grow.
Many of these companies are also building redundancy into their web
presence by housing their equipment at multiple locations to protect
against a network or server failure at any single location.
. Increasing Demand for High-Speed Internet Access. The rapidly expanding
number of Internet users and the growth in bandwidth-intensive
applications, combined with the availability of reasonably priced high-
speed access products, such as DSL, is increasing demand for high-speed
Internet connections, particularly among small- and medium-sized
businesses and individual consumers. Higher access speeds enable
businesses to maintain complex web sites, including web sites that allow
them to access critical business information, conduct electronic
business, or e-commerce, and communicate more efficiently with business
partners, customers and employees. Additionally, many companies are
supporting increasing numbers of remote offices and workers who require
high-speed access to network resources.
Traditionally, small- and medium-sized businesses, telecommuters and
individuals have relied on low speed lines for data transport. For
example, according to International Data Corporation, approximately 78%
of Internet access revenue derived from small- and medium-sized business
in 1997 was generated using relatively slow 28.8 to 56 kilobits per
second dial-up modems or integrated services digital networks, or ISDN,
lines. In the future, we believe there will be an increasing demand for
high-speed connectivity as businesses, telecommuters and individuals seek
solutions with higher data transmission speeds.
. Trend Toward Outsourcing of Internet Operations. Our customers are
increasingly finding that investing in the resources and personnel
required to maintain their web infrastructure is cost-prohibitive and
extremely difficult given the shortage of technical talent and the risk
of technological obsolescence. As a result of these factors, many small-
and medium-sized businesses are seeking to outsource their web facilities
and system needs, to focus on their core competencies. Demand for web
hosting, co-location services and outsourced e-commerce solutions is
expected to grow. International Data Corporation has estimated the demand
for web hosting services in the U.S. was approximately $770 million in
1998 and is expected to grow to approximately $12 billion by 2002.
The FirstWorld Solution
We provide a variety of Internet, data and communications services,
including high-speed Internet access, web hosting and design, data center
services, e-commerce solutions and web integration and consulting services. To
complement our data services offerings, we also provide local and long
distance telephony services in selected markets. Our strategy is designed to
offer our customers a single source solution to meet the full range of their
increasingly complex Internet, data and communications needs. We primarily
market our services, using a consultative sales approach, to small- and
medium-sized businesses, and secondarily to larger businesses, wholesale
customers and consumers. We typically seek to bundle our services, however,
our customers can select from the services we offer to tailor the most
appropriate solution for their needs. We believe the FirstWorld solution
offers a number of benefits to our customers including:
. Single Source Data Solution. We currently provide a broad range of
Internet and data services that allow our customers to effectively
outsource their Internet and data needs to a single provider. Today, we
believe most service providers provide a subset of the services that we
offer and that we represent a new, single source Internet and data
solution. We differentiate our services from our competitors by providing
our customers with sophisticated, integrated data solutions and superior
customer service. In addition, we attempt to bundle our services which
allows us to lower customer turnover, increase revenue per customer and
lower customer acquisition costs.
. Flexibility and Scalability. We have designed our service offerings to
enable customers to purchase the level of service, product set, access
speed and functionality that meet their existing requirements while at
48
<PAGE>
the same time allowing them to easily upgrade services as their Internet
and communications needs grow. We provide flexible service pricing,
billing our customers according to their bandwidth and capacity
utilization, as opposed to traditional flat-rate billing.
. Small- and Medium-Sized Business Focus. Our primary target market is
small- and medium-sized businesses, which we believe have traditionally
been underserved by larger communications providers and are increasingly
looking to outsource their Internet, data and communications
requirements. Using a consultative sales approach, we work with small-
and medium-sized businesses to solve the full range of these needs. These
businesses typically lack the expertise to address all of their Internet,
and data requirements in-house and are therefore best positioned to
benefit from our solution.
. Reliable and Secure Data Centers. We currently operate five data centers
and are in the process of constructing six additional data centers to
meet the growing demand for third party co-location services. Our data
centers are geographically distributed, technologically advanced
facilities with uninterruptible power supplies, back-up generators, fire
suppression, computer floors, separate cooling zones, seismically braced
racks, 24 hours, 7 days a week monitoring and high levels of security.
Through these centers we offer our customers a secure environment in
which to house their critical data communications equipment and obtain
access to high bandwidth connectivity to the Internet.
. High-Speed, Cost-Effective Internet Access. We provide a full range of
high-speed Internet access products from a wide range of DSL service
options through DS-3 connectivity, allowing our customers to choose a
cost-effective solution that fits their high-speed access needs. We also
offer dial-up Internet access for those seeking entry-level connectivity
and remote access services.
. High Quality Service and Customer Support. We strive to provide our
customers with end-to-end solutions to their Internet, data and
communications needs. An important part of our solution is to provide our
customers with superior customer service and support. We believe that
this differentiates us from many of our competitors, particularly larger
service providers who have typically not focused on our market segment.
By organizing a direct sales organization around customers and focusing
on end-users' needs, we seek to attain a high level of customer
satisfaction, achieve customer loyalty and accelerate the adoption of our
services.
Growth Strategy
Our objective is to become a leading provider of a comprehensive range of
Internet, data and communications solutions. Key elements of our strategy
include:
. Provide Single Source Internet, Data and Communications Services. We seek
to provide a broad range of services to fulfill the Internet, data and
communications requirements of our customers. We believe that "one-stop
shopping" capabilities enable us to provide significant value to our
customers and ultimately reduce customer turnover. As such, we are in the
process of expanding our service offering in each of the markets we have
entered within the last year to offer a comprehensive range of data
products and services and offer a single source solution in each of our
markets.
. Focus on Internet and Data Products. We focus on selling Internet and
data services to attract customers to our solution. We believe that our
focus on data solutions differentiates us from other communications
companies, many of whom sell a limited number of data services, and
enables us to attract customers with intensive Internet and data needs.
We are also continuing to develop and expand our data product set with
services and features that have technologically advanced and value-added
capabilities to serve the evolving needs of our customer base.
Additionally, we currently operate five data centers, and are
constructing an additional six centers to allow customers in each of our
markets access to co-location and other services.
. Employ Consultative Sales Approach. Our sales personnel consult with our
customers, offering them a broad array of products and services and
tailored Internet, data and communications solutions to fit their
49
<PAGE>
business needs. Our direct sales force has been trained to sell a
comprehensive Internet, data and communications product set. We believe
that by actively consulting with customers to help them identify and
implement their data communications initiatives, we develop close
relationships with our customers, enhance customer retention and
differentiate ourselves from our competitors.
. Deploy Flexible, Cost-Effective Networks. To provide Internet, data and
communications solutions, we are deploying an advanced integrated
platform that utilizes standard, scalable resources and standardized,
scalable architecture components, including Lucent Pathstar packet-based
switches, Cisco routers and Sun servers. We have designed our networks,
including our central office service platform, to support a wide array of
services and to be compatible with technologies still under development
in the industry. We use a demand-driven approach to network deployment,
marketing our services to a geographically targeted cluster of businesses
before committing to implementation of network infrastructure.
Additionally, we seek to combine elements of our network with those of
other service providers to offer a more cost-effective solution to our
customers and expand our network reach.
. Expand Our Market Footprint. We are aggressively seeking to expand our
presence into new geographic markets. We currently serve customers in
eight metropolitan areas and plan to expand our service area to two new
metropolitan markets by the end of 2000. We believe that increasing the
number of markets we serve will allow us to leverage our network
infrastructure and provide a more cost- competitive service.
. Pursue a Focused Acquisition Strategy. To date, we have acquired eight
companies to expand our Internet and data product offerings and
geographic market presence. We expect to continue to aggressively pursue
a strategy of acquiring Internet and data communications companies that
accelerates our penetration into new markets, grows our customer base and
increases the breadth of our product offerings. By accelerating market
entry through acquisitions, we can quickly acquire new customers in a
given region, cross-sell additional data services to existing customers
and enhance our network utilization. Our senior management team has
significant experience in the acquisition and integration of businesses.
Our Markets
We currently provide service in eight metropolitan areas in California,
Colorado, Illinois, Oregon, Texas and Utah. Additionally, we plan to deploy
our services in two additional metropolitan markets by the end of 2000. We
believe that increasing the number of markets we serve will allow us to
leverage our network infrastructure and provide a more cost-competitive
service.
We evaluate new markets based on their demographic profile, competitive
landscape and the availability of network facilities, including the Enron
nationwide long-haul network.
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<PAGE>
The following table shows our existing and planned primary markets for 1999
and 2000 as well as the services we currently offer and expect to offer in
that time frame. In the following table, the term Internet refers to high-
speed Internet access services including dedicated access and DSL; dial-up
Internet access; web hosting and design services; and e-commerce solutions.
Additionally, we define our primary markets as those in which we have or plan
to have sales staff resident in the market.
<TABLE>
<S> <C> <C> <C>
Primary Markets Market Entry Date Current Services Offered Future Services
Los Angeles (1) 3Q97 . Internet --
. Data center
. Voice
. Web integration
- ---------------------------------------------------------------------------------------
Portland (1) (2) 4Q98 . Internet . Data center
. Web integration
- ---------------------------------------------------------------------------------------
San Francisco Bay Area 1Q99 . Internet . Voice
(1) (2) . Data center
. Web Intergration
- ---------------------------------------------------------------------------------------
Houston (1) (2) 2Q99 . Internet . Data center
. Web integration
- ---------------------------------------------------------------------------------------
Denver/Front Range (1) 2Q99 . Internet . Voice
(2) . Data center
. Web integration
- ---------------------------------------------------------------------------------------
Salt Lake City (1) (2) 2Q99 . Internet . Data center
. Web integration
- ---------------------------------------------------------------------------------------
Chicago (1) (2) 3Q99 . Internet --
. Data center (3)
- ---------------------------------------------------------------------------------------
San Diego (1) 4Q99 . Internet . Voice
. Data center
. Web integration
- ---------------------------------------------------------------------------------------
Dallas (1) 2Q00 -- . Internet
. Data center
. Web integration
- ---------------------------------------------------------------------------------------
Seattle (1) 4Q00 -- . Internet
. Web integration
</TABLE>
- --------
(1) Indicates that we have received or applied for competitive local exchange
carrier certification, meaning that we can provide telephony service
directly rather than by reselling services provided by other
communications companies.
(2) Indicates markets we entered through acquisition.
(3) Data center services in Chicago are currently provided out of a facility
owned and managed by a third party.
Our Products and Services
We provide a wide range of Internet, data and communications products and
services that enable our customers to increase the speed, efficiency and
reliability of their communications. These products and services include:
. Internet access services, including dial up, ISDN, DSL and dedicated
access;
. data center services;
. web hosting and design services;
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<PAGE>
. e-commerce solutions;
. web integration and consulting services; and
. voice services.
Our products and services are designed to meet the evolving needs of our
customers and to support them as those needs grow, thus enhancing sales
efficiency and lowering customer turnover. We believe that our comprehensive
product and service offering enables us to provide single source solutions
that support our customers' Internet, data and communications needs throughout
their business lifecycle.
Internet Access Services. We offer a variety of Internet access solutions,
providing customers with reliable access to the Internet. With access speeds
ranging from 56 kilobits per second for entry-level dial-up customers to
dedicated services at 1.54 megabits per second (T-1) to 45 megabits per second
(DS-3) for large enterprise users and growing online businesses, we tailor our
Internet access offerings to meet the varying needs of our customers. Many new
customers are selecting advanced, high-speed access services such as DSL
services. DSL services allow data transfer rates at speeds of up to 7.1Mbps
over existing copper telephone lines. Our access customers can also purchase
our enhanced web services, such as domain name registration, web hosting,
additional Internet protocol addressing, and multiple e-mail accounts. All of
our customers have access to technical support 24 hours a day, 7 days a week.
The following table describes several of our most popular Internet access
services:
<TABLE>
<CAPTION>
Description Speed Monthly Price
- -----------------------------------------------------------------------
<S> <C> <C>
Dial-Up Services
Basic . 56Kbps $19.95
Business . 56Kbps $34.95
- -----------------------------------------------------------------------
ISDN
Residential Flat-rate . 128Kbps $29.95
Business Flat Rate . 128Kbps $49.95
- -----------------------------------------------------------------------
DSL
Residential . 384Kbps-1.54 Mbps download $49.95-$289.95
. 128Kbps-1.54Mbps upload
Business . 144Kbps-1.54Mbps download $119.95-$425.95
. 384Kbps-1.54Mbps upload
- -----------------------------------------------------------------------
Dedicated Access
Fixed Access . 128Kbps-45Mbps $399-$29,500
Burstable Access . Burst 128Kbps $599 +
. Burst 768Kbps $974 +
. Burst 6Mbps $5,000 +
</TABLE>
Data Center Services. We currently operate data centers in Glendale, Santa
Clara, San Diego, Irvine and Denver and are constructing additional data
centers in Dallas, San Francisco, Irvine, Salt Lake City, Portland and Houston
to meet the growing demand for third-party co-location services. We also
provide data center services in the Chicago area using leased facilities. Our
data centers house our Internet, data and packet-switching equipment and
provide space for our customers to co-locate their own equipment. These
facilities provide a secure, monitored environment, coupled with high-speed
connectivity to the Internet. Our data centers have a number of features
designed to assure continuous, reliable service, including uninterruptible
power supplies, back-up generators, fire suppression, computer floors,
separate cooling zones and, where required, seismically braced racks. These
centers are monitored 7 days a week, 24 hours a day. We plan to open data
centers in each of our markets to offer our customers a full range of data
center services.
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Our data center customers require the higher performance, reliability and
security associated with housing their equipment at a third-party custom data
center. Customers have physical access to the equipment they co-locate in our
facilities 24 hours a day, 7 days a week and remote access for software
maintenance and administration. Specialized services are also available for
those customers who want us to manage and administer their co-located hardware
or software.
We support most leading Internet hardware and software platforms, including
Ascend, Check Point Software, Cisco, Compaq, Lucent, Microsoft, Netscape,
Oracle, and Sun Microsystems. In addition, we can host a variety of software
applications in our data centers, making them available to customers in a
secure environment and with direct connectivity to the Internet. Standard
applications include advanced e-mail services, e-commerce applications, HTML
development, security and firewall services, remote monitoring and backup and
web authoring.
Web Hosting and Design. We offer a variety of shared and dedicated web
hosting services that allow customers to create and maintain high quality,
sophisticated Internet sites without purchasing, configuring, maintaining and
administering the necessary hardware, software and Internet connectivity that
would be necessary if they were to create and host the sites themselves.
Our shared web hosting services, targeted to small- and medium-sized
businesses, can be rapidly deployed and include standard levels of storage on
our servers and data transfer bandwidth that can be increased to accommodate
our customers' expanding needs. Our standard monthly prices range from $19.95
to $99.95 for these services. Additional development tools, such as Microsoft
FrontPage extensions, server-side scripting and custom interfaces, give
customers the ability to grow their Internet business. We also offer utility
programs that enable customers to control, maintain and update their sites
remotely, monitor site performance, create reports on site activity, check
billing information and evaluate the overall performance of their web site.
All shared hosting servers have regular back-up and recovery procedures to
protect customer files and are monitored with the same systems that we use to
monitor our own network systems and transport backbone.
Our dedicated server web hosting services are targeted to customers
desiring substantially more server and network capacity or for customers
desiring their own physical server. We support the two most common operating
systems, Windows NT and UNIX. Our customers can create and support
applications that are more complex, require higher throughput, and have
greater storage requirements while still outsourcing the maintenance and
monitoring of their site and equipment. In addition, we can typically create
and configure these platforms within several business days. Customers can
control and monitor these dedicated servers with all the same tools that are
available for our shared hosting customers.
E-commerce Solutions. Our e-commerce products and services are designed to
enable our customers to easily design a web site that allows them to sell
their products and services on-line and execute electronic transactions. In
August 1999, we licensed advanced e-commerce software from Intershop that
provides an application platform that allows our customers to establish their
own e-commerce sites without the significant capital investment and expert
personnel usually required in e-commerce web site creation. Using our
application platform, a customer can quickly create an e-commerce site that
includes product descriptions, graphics, a credit card transaction system,
security, encryption and back-end marketing support utilities. Additionally,
we have the ability to create custom web sites for our larger customers
requiring features or functionality not available from our standard Intershop
package. Custom service offerings are typically priced on a per-hour basis.
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We offer the following categories of e-commerce products with varying price
and feature categories to address a range of customer needs.
<TABLE>
<CAPTION>
Product Features Monthly Price
- -------------------------------------------------------------------------------
<S> <C> <C>
First eBusiness 1 . 25 products $ 34.95
. 3 departments
- -------------------------------------------------------------------------------
First eBusiness 2 . 100 products $ 79.95
. 10 departments
- -------------------------------------------------------------------------------
First eBusiness 3 . Unlimited products $139.95
. 1,000 departments
. Some reporting features
- -------------------------------------------------------------------------------
First eBusiness 4 . Unlimited products & departments $255.95
. Advanced reporting tools
. Custom development tools
- -------------------------------------------------------------------------------
First eBusiness . Hosting features Varies based on project
Community
. Co-location requirements
. NT or Unix platforms
- -------------------------------------------------------------------------------
</TABLE>
As our customers' needs grow, they can easily upgrade to a more
sophisticated e-commerce solution while maintaining the same development
environment.
Web Integration and Consulting. As part of our acquisitions of Optec and
Intelenet, we acquired considerable expertise in planning, designing and
implementing advanced network solutions. These solutions include high-speed
Internet access, router and server design and configuration, and security and
operational support systems. Our services include client/server consulting,
implementation, support services, network management and monitoring and
equipment sales. For high-end customers needing sophisticated network
solutions, such as large enterprise customers, corporate or regional
headquarters locations and state and local government agencies, we have a
consulting practice that provides an integrated solution to complex
communications problems.
Our web integration services involve enterprise network design and
consulting, specification, purchase, installation and maintenance of servers,
routers and related infrastructure. We provide these web integration and
consulting services to complement our existing products and services in
selected markets. While we believe that offering web integration and
consulting services will provide us with access to a broader customer base, we
expect consulting and equipment sales to decrease as a percentage of total
revenue in the future as we grow our data services offerings.
Telephony Services. We currently offer telephony service in the Los Angeles
metropolitan market. We are installing telephony switching equipment to serve
the San Francisco and the San Diego metropolitan areas and expect to begin
offering telephony services to customers in these markets by the second
quarter of 2000. In addition, we also plan to install telephony equipment in
Denver in 2000. We provide telephony services to complement our Internet and
data offerings, including local, long distance and private line services.
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Our Customers
We market our services primarily to small- and medium-sized businesses. We
also selectively market our services to larger businesses, consumers and
wholesale customers. We employ a market segmentation strategy, which involves
tailoring our service offerings, sales and marketing techniques and network
deployment to meet the varying needs of small- and medium-sized businesses,
larger businesses, consumers and wholesale customers. Our consulting, sales
and marketing initiatives and tailored product offerings are designed to
reflect the varying customer buying patterns and address competitive factors
in our target market.
Small- and Medium-sized Businesses. Small- and medium-sized businesses
typically have between two and 1,000 employees and often access the Web using
slower speed dial-up access, or have no Internet access at all. Many of these
businesses maintain either a very limited web site, or none at all, and an
extremely small percentage of these businesses are conducting e-commerce. We
believe we add significant value to small- and medium-sized business customers
by offering them a broad range of Internet and data services. Moreover, we
believe our ability to understand customers' needs through consultative sales
efforts and to meet those needs through bundled service offerings will enhance
our reputation for value and ultimately result in additional revenues.
Major Accounts. Major accounts include larger businesses as well as
companies whose primary activities take place on the Web. We believe that
these customers are increasingly looking to outsource the housing of the
equipment that supports their web site, e-commerce platform and content
applications, as well as the monitoring and maintenance of this equipment, at
secure, environmentally sound third-party locations. Our data center services
offer these customers a variety of solutions to meet their needs.
Wholesale. We market our wholesale product line primarily to Internet
service providers and other service providers such as web developers and
content providers. Our primary wholesale service offerings include DSL
connectivity, co-location services and dedicated Internet services. We believe
that smaller service providers will continue to find it cost effective to
purchase services on a wholesale basis from larger providers such as
FirstWorld. Additionally, these accounts allow us to leverage the fixed cost
components of our network by adding traffic quickly to our network.
Consumer. Consumer customers are individual, home office and single
employee businesses requiring services that range from dial-up access to
broadband DSL access to value-added Internet services, such as e-mail
applications, web hosting and design, basic e-commerce and file transfer
services. We believe that these customers will increasingly demand higher
speed access and more sophisticated web functionality and will look to their
Internet provider to facilitate such services.
As of September 30, 1999, we had approximately 71,950 active accounts,
including 1,450 DSL, 1,350 dedicated access, 57,000 dial-up, 11,000 web
hosting, 200 web integration and 950 telephony accounts.
Sales and Marketing
We market our services primarily through our direct sales force, employing
a consultative approach. We believe that our direct sales strategy allows us
to develop close relationships with our customers and manage the sales and
service process more effectively. Small- and medium-sized businesses, in
particular, often do not have a dedicated, in-house communications manager and
consequently prefer to purchase services from an integrated or a single source
solution provider. As a result, we believe that our ability to provide a
comprehensive range of Internet and data solutions and act as an experienced
consultant is attractive to our current and potential customers. We have also
developed a sales methodology and a training program that we believe to be a
key ingredient in our ability to successfully compete for the data
communications requirements of our customers.
55
<PAGE>
Direct Sales Channels
As of September 30, 1999, we had 134 sales and technical personnel and 14
sales offices supporting our sales efforts as indicated in the following
table:
<TABLE>
<CAPTION>
Target Market Sales Channel
<S> <C>
Small- and medium- . Account manager (by territory)
sized businesses
. Indirect agents
. Leads through telemarketing
-------------------------------------------------------------------------
Major accounts . National account manager (by product)
-------------------------------------------------------------------------
Wholesale customers . Wholesale account manager
-------------------------------------------------------------------------
Consumer . Web site presence
. Advertising and direct mail
. Inbound telemarketing
</TABLE>
-----------------------------------------------------------------------
Our direct sales force consists of:
. Account Managers. Account managers focus on selling our end-to-end
Internet and data services to small- and medium-sized businesses. Account
managers qualify customer leads and establish initial appointments.
Account managers are supported by sales engineers who assist in pre- and
post-sale technical consulting. Sales managers and regional sales
directors also provide local sales leadership to the account teams in
each market.
. National Account Managers. National account managers focus on selling our
services to larger accounts, typically technology intensive businesses
with multiple locations and large numbers of distributed workers and to
businesses who conduct a significant amount of business on the Web.
National account managers primarily focus on selling our data center
solutions to these customers. Our national account managers seek to work
directly with the chief information officer and the communications
manager responsible for Internet services in the target account. National
account managers are supported by regional sales directors who provide
leadership and sales strategy, as well as sales and network engineers to
assist with custom, sophisticated solutions.
. Wholesale Account Managers. Wholesale account managers focus on selling
our services to Internet service providers and other service providers.
Our wholesale account managers sell DSL connectivity, co-location
services and dedicated Internet services. Wholesale account managers are
supported by regional sales directors who provide leadership and sales
strategy.
Indirect Sales Channels
We also market our services through indirect channels, including network
service providers, independent agents and value-added resellers. We offer each
service provider the ability to select those services that it would like to
bundle with its own service offerings to offer a total solution to its
customers. As of September 30, 1999, we had two sales and technical personnel
supporting our indirect sales efforts.
Marketing
Our marketing team develops and implements our positioning, branding,
pricing and promotional strategies. We have formulated detailed criteria for
identifying target customers for each of our services and have created a
bundle of services to be offered to each segment of our potential customer
base. In particular, we are focused on building our brand identification as we
roll out our service offerings. We promote our brands through direct mail to
targeted accounts, outdoor advertising, radio advertisements, print
advertisements and our general public relations effort.
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<PAGE>
Network Architecture and Technology
We deliver our services over a communications network that utilizes
advanced packet-switching technology and the communications protocol known as
Internet Protocol, or IP, that enables us to provide cost-effective services
to our customers. Our network combines equipment housed in our data centers
and equipment interconnected to the telephone company's central offices with
redundant, high-speed connectivity to the Internet backbone. Our metropolitan
networks consist of elements we own as well as elements we lease from third-
parties. We believe that this approach allows us to deploy a network that is
both cost-effective and responsive to our customers' needs. Our metropolitan
networks will be connected via the long-haul capacity we purchased from Enron
as part of the Optec acquisition, or via capacity purchased from other long-
haul carriers, to create a national platform for the provision of our
services.
Our current infrastructure includes Internet equipment in all of our
markets, fiber in Portland and the Los Angeles basin and a Nortel DMS 500
local switch housed in Anaheim, and DSL access equipment located in incumbent
carriers' central offices. Although we intend to keep utilizing this local
switch for existing customers, we have recently installed a new packet-based
switching facilities utilizing the Lucent Pathstar switching platform in the
Los Angeles basin, and are currently installing additional Pathstars in San
Diego and the San Francisco Bay Area. We anticipate that the Pathstars
currently being installed in San Diego and the San Francisco Bay Area will be
operational during the second quarter of 2000. In addition, we plan to install
a Lucent Pathstar switch in Denver in 2000. This Pathstar equipment provides
the network infrastructure for a single voice and data path to the customers,
reduces equipment cost, lowers space and power requirements and decreases on-
going network operations costs.
As part of the Optec acquisition we acquired rights to use 15 OC-3 level
data network capacity increments in cities located on Enron's long haul
network currently under construction. An OC-3 level data network capacity
increment represents the capacity to transport 155 million bits of information
per second from one point to another. Enron has advised us that capacity is
available in Portland, Los Angeles and Salt Lake City. Enron is obligated to
deliver capacity to Denver, Houston, Dallas and Miami by November 24, 2001. If
capacity is not delivered by this date we may extend the agreement. We may
select capacity increments in additional cities or increase capacity in
selected cities which in the aggregate does not exceed 15 OC-3 level
increments. Our rights terminate on the earlier of November 24, 2005 or 4
years after the date capacity is made available to the last of the cities
listed above.
Equipment. In markets where we will offer local telephony services, we have
selected the Lucent Pathstar as our switching platform. The Pathstar switching
infrastructure combines five elements into one platform and offers the ability
to transport both voice and data traffic:
. A Class 5 Telephony System allowing for the provision of local telephony
services;
. VoIP Gateway for the provision of IP services;
. DSL Access Equipment capable of supporting ADSL and that will be G.Lite
compatible;
. Digital Loop Carrier enabling us to access our customers over existing
local network facilities; and
. Edge Router which is a remote router housed at our central office co-
locations that allows data traffic to be directly routed to the Internet.
The Cisco BPX is our core ATM switch. This switch connects our central
office co-locations to our data centers and serves as a primary backbone
switch, providing our integrated service platform with the highest quality of
service and reliability.
Data Center Facilities. We maintain facilities in each of our markets to
house our Internet, data, telephony and packet switching platforms. In each of
our markets we have expanded or plan to expand these facilities into Internet
data centers, or IDCs, which include space for customers who want to co-locate
their equipment with ours. We currently operate five data center facilities in
four markets and we are building additional data center
57
<PAGE>
facilities in each of our markets. We plan to have 11 data center facilities
by the end of 2000. These centers will support an Internet gateway platform,
allowing a full range of Internet access, shared and dedicated server hosting
products, as well as co-location space for our customer's equipment.
Telephone Company Central Office Facilities. We establish our central
office co-locations by installing equipment in the incumbent local exchange
carrier's central offices. We use DSL technology to transmit high-speed data
over copper lines between our customers and a central office. We install an
endpoint device at the customer's premise to manage the transmission of data
from the customer's internal information technology system to a central
office. We plan to install ATM switches in each of our data centers to more
efficiently aggregate and consolidate data in our markets. From the data
center, traffic is transported on our network to major Internet traffic
exchange points or the public switched transport networks. Leasing existing
transport services from other providers, including the copper wire to our
customers' premises wherever possible, allows us to focus our capital outlay
on the value-added elements of our network, including equipment, ATM switches,
routers and data centers.
Digital Subscriber Line, or DSL, Technologies. We use a variety of DSL
technologies that we purchase from multiple vendors. We provide DSL services
utilizing our own network as well as reselling the networks of others. DSL
switching technology provides for high-speed transmission of information over
existing copper telephone lines by encoding the information in a digital
format. This allows us to offer connection speeds ranging from 128Kbps to
7.1Mbps. Actual speeds are a function of the distance from the end user or
local area network to the central office and the quality of the copper line.
We describe the basic features and the market positioning of our primary DSL
technologies below.
. Rate Adaptive Digital Subscriber Line, or RADSL. RADSL technology allows
each end user or local area network to utilize the full digital
capability of the underlying telephone line. Speeds reach up to 7.1 Mbps
downstream and up to 1.1 Mbps upstream if the end user or local area
network is within 15,000 feet, or approximately 2.8 miles, of the central
office. We use this technology for end users or local area networks
needing very high access speeds. Our target customers for RADSL
connections consist of small- and medium-sized businesses and branch
offices of large businesses needing T-1 or higher speeds. We believe that
these businesses often find the cost of dedicated private line or frame
relay services to be prohibitive. We believe our RADSL connection
competes favorably on a price/performance basis relative to traditional
fractional T-1 and frame relay services. The service also provides the
highest speed of any DSL service for bandwidth intensive applications.
. Symmetric Digital Subscriber Line, or SDSL. SDSL technology allows end
users to achieve up to 1.5 Mbps speeds both downstream and upstream.
Depending on the quality of the copper line, 1.5 Mbps can be achieved if
the end user or local area network is within 8,000 feet, or approximately
1.5 miles, from the central office.
. Integrated Digital Subscriber Line, or IDSL. IDSL technology allows us to
reach end users or local area networks up to 28,000 feet, or
approximately 5.3 miles, from a central office. IDSL service operates at
up to 144 Kbps in each direction. This service can use existing ISDN
equipment at the end user site, and is targeted at the integrated
services digital network replacement market. For information intensive
users, we believe that IDSL compares favorably with integrated services
digital network on a price/performance basis when the monthly flat rate
IDSL charge is compared with the per minute integrated services digital
network charge.
National Operations Center. Our network is managed from our National
Operations Center in Anaheim. The center is staffed 7 days per week, 24 hours
per day and monitors the integrity and performance of the entire network,
including environmental and security systems. Our monitoring network is
independent from our transport network, providing complete independence for
fault monitoring. Our monitoring capabilities extend from our data centers
through the telephone company central offices to the customer premise
equipment.
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<PAGE>
Information Technology and Support Systems
We currently have billing and other back-office systems to support our
different lines of business. We are in the process of upgrading many of those
systems to support our planned expansion, end-to-end customer relationship
management and cross-product bundling. We expect that these upgrades will
provide us with a scalable system that will not only provide greater
efficiencies for supporting a large diverse customer base, but also
differentiate the value proposition we offer to customers. We expect to
substantially complete this upgrade by the end of 1999.
Our approach to systems focuses on implementing mature, best-of-class,
commercial off-the-shelf applications that we integrate through an advanced
messaging protocol that allows consistent communication and coordination
throughout our entire network. Web-based user interfaces are designed to be
used by both internal and external customers for such activities as account
activation, billing presentment, trouble ticket and sales funnel management.
We plan to leverage our internal expertise with that of outside vendors to
assist with project/program management and implementation/integration
services.
We have selected leading application and hardware vendors for key
functional requirements, including:
<TABLE>
<CAPTION>
Vendor Function
<C> <S>
Boardtown Internet service provider billing
-------------------------------------------------------------------------
Cisco Enterprise and ISP routers and switches
-------------------------------------------------------------------------
Compaq Network servers
-------------------------------------------------------------------------
Hewlett Packard Network management
-------------------------------------------------------------------------
Kenan Integrated voice and data billing
-------------------------------------------------------------------------
Lucent Switch interfaces, IP services
-------------------------------------------------------------------------
Macromedia, Allaire Web development
-------------------------------------------------------------------------
Microsoft SQL Server, mail/groupware and desktop applications
-------------------------------------------------------------------------
Onyx Sales force automation, customer management and
enterprise web portal
-------------------------------------------------------------------------
Oracle Relational database management system and internet
directory platform
-------------------------------------------------------------------------
Peoplesoft Accounting, finance and human resources enterprise
resource planning
-------------------------------------------------------------------------
Quintessent Third-party gateways and provisioning support
-------------------------------------------------------------------------
Sun Microsystems Enterprise and web application servers
-------------------------------------------------------------------------
Vitria Application integration, process mapping
-------------------------------------------------------------------------
</TABLE>
Although we are using standard commercial applications to address major
functionality of such processes as billing and customer care, we are
integrating these applications in a fashion to provide strategic and operating
advantages such as direct customer access to account information and
integrated provisioning for all products and services. In addition, certain of
our trading partners and application providers are working with us to jointly
develop specialized applications to support such processes as flow-through
provisioning, supply chain management and web-based processes. We expect these
activities to give us significant strategic advantages.
Competition
In each market area in which we offer or plan to offer services we compete
or will compete with several other service providers. Most of our competitors
have long-standing relationships with customers and suppliers in their
respective industries, greater name recognition and significantly greater
financial, technical, marketing
59
<PAGE>
and other resources than we do. We expect to compete on the breadth, quality
and reliability of our service offering; the quality and responsiveness of our
customer services; and price.
Internet Services. The Internet services market is extremely competitive,
and we expect competition in this market to intensify in the future. We
compete, or in the future we expect to compete, directly or indirectly with
the following categories of companies:
. national and regional Internet service providers;
. high-speed Internet access providers, including DSL and cable modem
companies;
. web hosting and data center companies;
. computer software and technology companies;
. national and regional telecommunications companies, including regional
bell operating companies and competitive local exchange carriers; and
. wireless service providers.
The entry of new participants from these categories and the potential entry
of competitors from other categories, such as computer hardware manufacturers,
would result in substantially greater competition for us.
Web Integration and Consulting. In the markets for web integration and
consulting, we compete against a number of companies focused on the data
integration and consulting market, including USWeb, INS, Sapient, Electronic
Data Services and IBM, as well as a number of small systems and network
integration service providers. In particular, we will be required to compete
with companies that design and manufacture products for the local and wide
area network markets and large system integrators.
Telephony. Our telephony services compete principally with the services
offered by incumbent telephone companies in the markets in which we operate,
including GTE and PacificBell. We also compete with various competitive local
exchange carriers including MFS Communications, Inc., NEXTLINK Communications,
Inc., ICG Communications, Inc., GST Telecommunications, Inc. and Teleport
Communications Group, Inc. The incumbent telephone company dominates each of
the markets targeted by us and possesses ubiquitous infrastructure and the
financial wherewithal to offer service at subsidized prices to maintain key
customers. We compete with incumbent telephone companies on the basis of
price, customer support and the ability to offer and provide value-added,
integrated service bundles. We compete with competitive local exchange
carriers by providing a variety of voice, data and Internet services in
different combinations to address the needs of different market segments.
Governmental Regulation
Our Internet operations are not currently subject to direct regulation by
the FCC or any other U.S. governmental agency, other than regulations
applicable to businesses generally. However, the FCC continues to review its
regulatory position on the usage of the basic network and communications
facilities by Internet service providers. Although the FCC has determined that
Internet service providers should not be treated as telecommunications
carriers and therefore should not be regulated, it is expected that future
Internet service provider regulatory status will continue to be uncertain.
Changes in the regulatory structure and environment affecting the Internet
access market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from the
incumbent telephone companies, interexchange carriers or other
telecommunications providers, could have an adverse effect on our business.
Although the FCC has decided not to allow local telephone companies to impose
per-minute access charges on Internet service providers, and that decision has
been upheld by the reviewing court, further regulatory and legislative
consideration of this issue is likely. In addition, some telephone companies
are seeking relief through state regulatory agencies. Nonetheless, the
imposition of access charges would affect our costs of serving dial-up
customers and could have a material effect on our business.
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<PAGE>
Our telecommunications common carrier services are subject to regulation by
federal, state and local governmental agencies. We have obtained all
authorizations and approvals necessary to conduct our operations as currently
conducted and believe that we are in compliance with all laws, rules and
regulations governing our current operations. We have received competitive
local exchange carrier certification in California, Colorado, Oregon, Texas,
Washington and Utah and have an application pending before the state Public
Utilities Commission in Illinois. We are also considering the financial,
regulatory and operational implications of becoming an authorized competitive
local exchange carrier in certain other states.
Changes in existing laws and regulations or any failure or significant
delay in obtaining necessary future regulatory approvals, could have a
material adverse effect on our business, financial condition and results of
operations.
The FCC has jurisdiction over interstate and international
telecommunications common carrier services. State regulatory commissions have
jurisdiction over intrastate telecommunications common carrier services
communications. Municipalities and other local jurisdictions may regulate
limited aspects of our business by, for example, regulating the use of rights-
of-way, imposing zoning and other requirements, and requiring installation
permits. We also are subject to taxation at the federal and state levels and
may be subject to varying taxes and fees from local jurisdictions.
Federal Legislation and Regulation. The Telecommunications Act of 1996,
enacted on February 8, 1996, substantially departs from prior legislation in
the telecommunications industry by establishing local exchange competition as
a national policy through the removal of state regulatory barriers to
competition and the preemption of laws restricting competition in the local
exchange market. The 1996 Act, among other things, mandates that (i) the
incumbent telephone companies permit resale of their services and facilities
on reasonable and nondiscriminatory terms and at wholesale rates, (ii) all
local exchange carriers (including us) allow customers to retain the same
telephone number, or number portability, when they switch local service
providers, (iii) incumbent telephone companies permit interconnection by
competitors to their networks at any technically feasible point that is at
least equal in quality to that which the incumbent telephone companies provide
to themselves and pursuant to reasonable and nondiscriminatory terms and cost-
based rates, (iv) the incumbent telephone companies unbundle their network
services and facilities at any technically feasible point and permit
competitors and others to use these facilities at cost-based, reasonable and
nondiscriminatory rates, (v) all local exchange carriers ensure that an end
user does not have to dial any more digits to reach customers of local
competitors than to reach the incumbent telephone companies' customers to the
extent technically feasible, or dialing parity, and (vi) all local exchange
carriers must establish reciprocal compensation arrangements for the transport
and termination of telecommunications traffic.
The 1996 Act gave the FCC significant responsibility for its
implementation, especially in the areas of universal service, access charges,
numbering, number portability and price caps. The details of the rules adopted
by the FCC, and the extent to which they are upheld by the courts reviewing
the FCC's rules, will have a significant effect on when and to what extent
barriers to competition in local services are removed. For example, the FCC
has the power to grant incumbent carriers increased flexibility to enable them
to reduce prices for special access, private line services and advanced
telecommunications services.
The 1996 Act provides incentives to most of the incumbent carriers to enter
into interconnection agreements with carriers like FirstWorld. We need
interconnection agreements to gain access to the incumbent carriers' networks.
Although we have obtained, or are in the process of entering into
interconnection agreements in all of our current markets, we cannot be certain
that incumbent carriers in new markets we seek to enter will negotiate quickly
with us or that any resulting agreements will be on terms favorable to us.
In January 1999, the U.S. Supreme Court upheld key provisions of the FCC
rules implementing the 1996 Act, in a decision that was generally favorable to
companies providing competitive communications services like FirstWorld. In
two earlier decisions, the United States Court of Appeals for the Eighth
Circuit had invalidated these rules. The Supreme Court's decision reinstated
all but one of the FCC rules invalidated by the Eighth
61
<PAGE>
Circuit. The Supreme Court held the FCC has general jurisdiction to implement
the 1996 Act's local competition provisions, including pricing and enforcement
jurisdiction. Significantly, the Court upheld the FCC's "pick and choose"
rule, which allows competitors to choose which provisions of other carriers'
interconnection agreements they wish to incorporate in their own
interconnection agreements with that incumbent carrier.
State Regulation. Many of our services will be classified as intrastate
services and therefore will be subject to state regulation. All of the states
where we operate, or will operate, require some degree of state regulatory
commission approval to provide certain intrastate services. In most states,
intrastate tariffs are also required for various intrastate services, although
we are not typically subject to price or rate of return regulation for
tariffed intrastate services. We may also be subject to a variety of other
state regulatory requirements, including interconnection, universal service,
reporting and customer service requirements.
The 1996 Act requires each state to remove barriers to entry and barriers
to competition for the incumbent telephone companies' competitors. While no
assurance can be given as to how quickly and how effectively each state will
act to implement this legislation, many state authorization processes are
being streamlined and the authorization time frames shortened considerably.
Several states have allowed the incumbent telephone companies rate, special
contract (selective discounting) and tariff flexibility, particularly for
services deemed subject to completion. Such pricing flexibility increases the
ability of the incumbent telephone companies to compete with us and constrains
the rates that we may charge for our services. In view of the additional
competition expected to result from the 1996 Act, states may grant the
incumbent telephone companies additional pricing flexibility. At the same
time, some incumbent telephone companies may request increases in local
exchange rates to offset revenue losses due to competition.
Under the 1996 Act, if a request is made by us, the incumbent telephone
companies generally have a statutory duty to negotiate interconnection and
access arrangements in good faith for our provision of local service (unless
they are exempted from such requirement as small or rural incumbent telephone
companies). We have completed or are in the process of entering into
interconnection agreements with the RBOCs within our territory. During these
negotiations, we or the ILEC may submit disputes to the state regulatory
commissions for mediation and, after the expiration of the statutory
negotiation period set forth in the 1996 Act, the parties may submit
outstanding disputes to the states for arbitration. To date we have not
submitted any disputes to the states for mediation or arbitration.
Local Regulation. We will need to interact with local governments in a
variety of ways, and may be required to obtain various permits and
authorizations from municipalities in which we operate. How diverse local
governments will exercise traditional functions, including zoning, permitting
and management of rights-of-ways, and address the expansion of
telecommunications competition and varying means of entry in particular, is
uncertain. The kinds and timing of approvals required to conduct aspects of
our business varies among local governments and may also vary with the
specific technology or equipment configuration used by us.
While the 1996 Act permits local governments to manage rights-of-way, the
scope of that authority, including the circumstances when fees can be charged
and the amount of such charges, has already been the subject of numerous
disputes between telecommunications carriers and such local governments. In
addition, some local governments have been requiring substantial filings and
review before telecommunications carriers can operate in their licensed areas
and have also required the payment of significant franchise fees or taxes.
Some of these disputes involving licensing of telecommunications carriers and
rights-of-way are in litigation and more administrative and court litigation
is likely. The prohibition of entry barriers set forth in the
Telecommunications Act and the FCC's power to preempt such barriers have been
addressed in these cases, which to date have rejected local government efforts
to impose "franchise" or tax obligations on competitive local exchange
carriers and other telecommunications carriers. The FCC has recently
preempted, and thereby prevented enforcement of, certain state and local
regulations that had the effect of inhibiting local competition. Any inability
or unwillingness by the FCC to preempt additional state and local regulations
in a timely fashion could have a material adverse impact on our business.
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<PAGE>
Intellectual Property
We regard our products, services and technology as proprietary and attempt
to protect them with copyrights, trademarks, trade secret laws, restrictions
on disclosure and other methods. These methods may not be sufficient to
protect our intellectual property. We also generally enter into
confidentiality agreements with our employees and consultants, and generally
control access to and distribution of our documentation and other proprietary
information. Despite these precautions, it may be possible for a third-party
to copy or otherwise obtain and use our products, services or technology
without authorization, or to develop similar technology independently.
Further, effective copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. The global nature of the
Internet makes it virtually impossible to control the ultimate destination of
our proprietary information. Steps taken by us may not prevent
misappropriation or infringement of our technology. In addition, litigation
may be necessary in the future to enforce our intellectual property rights to
protect our trade secrets or to determine that validity and scope of
proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources.
Employees
As of September 30, 1999, we had 658 employees (excluding temporary
personnel and consultants), employed in engineering, sales and marketing,
customer support and general and administrative functions. None of our
employees are represented by a labor union, and we consider our relations with
our employees to be good. Our ability to achieve our financial and operational
objectives depends in large part upon the continued service of our senior
management and key technical, sales, marketing and managerial personnel, and
our continuing ability to attract and retain highly qualified technical,
sales, marketing and managerial personnel. Competition for such qualified
personnel is intense, particularly in software development, network
engineering and product management.
Facilities
Our headquarters are located in Greenwood Village, a suburb of Denver,
Colorado. We have entered into a lease for approximately 42,000 square feet
which expires July 2002. We have an option to renew the lease for up to five
years. In addition, we have leases for various terms for our smaller regional
offices. We consider our headquarters and regional office space adequate for
our current operations. We also lease space in a number of traditional
telephone central offices and private facilities in which we locate our
Internet, data and communications equipment. The following table lists our
Internet data centers:
<TABLE>
<CAPTION>
Lease Approximate
Location Expiration Square Footage
-------- ------------- --------------
<S> <C> <C>
San Francisco, CA November 2009 40,000
Dallas, TX March 2010 38,000
Denver, CO August 2009 21,500
San Diego, CA March 2014 20,000
Santa Clara, CA April 2009 18,900
Glendale, CA July 2008 5,000
</TABLE>
Litigation
On May 13, 1999, the City of Anaheim filed a complaint in Orange County
(California) Superior Court, Case Number 809281, against FirstWorld and our
wholly-owned subsidiary, FirstWorld Anaheim. The City alleges that we and our
subsidiary repudiated our respective obligations under a series of agreements
that we entered into with the City in February 1997 primarily regarding the
development of a fiber-optic network located
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<PAGE>
in Anaheim, California. The City specifically alleged that we materially
breached certain of our respective obligations under those agreements by
failing to:
. commence construction and operation of a demonstration center;
. provide verification that phase I of the construction of the network is
substantially complete;
. provide a Subsequent Implementation Program, a report that specifies
construction, operation and maintenance activities;
. comply with certain specified auditing procedures; and
. make a quarterly payment under the agreements.
The City alleges that it is entitled to damages in excess of $45 million as
well as costs, pre-judgment interest and such other relief as the court deems
proper. The City also seeks specific performance compelling us to completely
perform some or all of our obligations under the agreements.
In response to the lawsuit, we filed a motion to compel arbitration and
requested a stay of the court proceeding. On September 16, 1999, the court
granted our motion. On October 6, 1999, the court entered a written order
finding that there is a valid arbitration provision in the agreements and that
the City had not established that we unequivocally repudiated the agreements.
The court action has been stayed pending completion of the arbitration. The
City has not commenced arbitration procedures pursuant to the arbitration
provision in the agreements. We believe that we are not in breach of the
agreements as alleged and intend to vigorously defend any such claims by the
City. However, the outcome of this dispute is uncertain and cannot be
predicted at this time. Any adverse result could have a material adverse
effect on our company's financial condition and results of operations.
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MANAGEMENT
Executive Officers and Directors
Our directors, executive officers and key employees and their ages as of
October 31, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Donald L. Sturm (1)........... 67 Chairman of the Board
Sheldon S. Ohringer (1) (4)... 42 President, Chief Executive Officer and
Director
David J. Gandini.............. 41 Executive Vice President
Jeffrey L. Dykes.............. 44 Senior Vice President, General Counsel and
Secretary
Marion K. Jenkins............. 46 Senior Vice President of Information
Technology and Chief Information Officer
Douglas L. Kramer............. 45 Senior Vice President and Chief Technical
Officer
Scott M. Chase................ 31 Senior Vice President, Corporate and
Government Affairs and Assistant Secretary
Paul C. Adams................. 36 Vice President of Finance, Treasurer and
Assistant Secretary
C. Kevin Garland (1) (3) (4).. 31 Director
Stephen R. Horn (2)........... 42 Director
James O. Spitzenberger (2).... 55 Director
John C. Stiska (2)............ 57 Director
Melanie L. Sturm (3).......... 38 Director
</TABLE>
- --------
(1) Member of the Chairman's Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
(4) Member of the Equity Investment Committee
Donald L. Sturm. Mr. Sturm has been Chairman of our board of directors and
head of the Chairman's Committee since January 1998. Mr. Sturm served as
President from January 1998 through September 1998 and as Chief Executive
Officer from March 1998 through September 1998. Since December 1991, Mr. Sturm
has been a private equity investor, with interests in telecommunications,
banking and real estate, among others. Mr. Sturm currently serves as chairman
of the board of three bankholding companies with nine banks that he owns in
the Rocky Mountain area and the Midwest. Mr. Sturm was a member of the group
that brought Continental Airlines out of bankruptcy in 1993, and currently is
a significant stockholder and director of Continental. Prior to December 1991,
Mr. Sturm served as Vice Chairman of Peter Kiewit Sons' Inc., a construction,
coal mining and telecommunications company that has made significant
investments in other industries. In 1984, Mr. Sturm led Peter Kiewit Sons'
$3.5 billion acquisition of The Continental Group Inc. and became the
Continental Group's Chairman and Chief Executive Officer, positions he held
until Peter Kiewit Sons' sold the Continental Group in 1991. While Vice
Chairman of Peter Kiewit Sons', Mr. Sturm participated in decisions to invest
in MFS Communications which was taken public in 1993 and sold to MCI WorldCom,
Inc. in 1996 for approximately $14.4 billion. Mr. Sturm owns significant
ownership interests in MCI WorldCom, Level 3 Communications, Inc., and KAPT, a
Paris, France based telecommunications company.
Sheldon S. Ohringer. Mr. Ohringer has been Chief Executive Officer,
President, a director of FirstWorld and a member of the Chairman's Committee
since October 1, 1998 and a member of the Equity Investment Committee since
November 1999. Beginning in November 1994, Mr. Ohringer served in various
capacities for ICG Communications, Inc., most recently as Executive Vice
President--Telecom of ICG Communications and President of ICG Telecom Group,
Inc., an operating subsidiary of ICG Communications. Before working for ICG,
Mr. Ohringer was Senior Vice President of Sales and Business Development for
U.S. Long Distance Corp. from May 1991 until October 1994. From May 1984 until
August 1990, Mr. Ohringer held key management and executive positions with
Telecom* USA, a long distance carrier which was acquired by MCI WorldCom in
1990. Mr. Ohringer received a B.A. degree in Business Administration from the
University of Iowa in December 1979.
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David J. Gandini. Mr. Gandini has been Executive Vice President of
FirstWorld since November 1998. Mr. Gandini is responsible for sales and field
operations. From 1996 to October 1998, Mr. Gandini served in various
capacities at ICG Telecom, most recently as Senior Vice President of Wholesale
Services and President of Long Distance Operations. During this period, Mr.
Gandini directed the construction of a 166-node network, one of the largest
voice/data/Internet Protocol domestic networks. Before joining ICG Telecom,
Mr. Gandini was the President of Pace Network Services. Mr. Gandini was
recently ranked among the top 50 most influential people in competitive long
distance by Phone+, an industry trade publication. Mr. Gandini received a B.A.
degree in telecommunications from Michigan State University.
Jeffrey L. Dykes. Mr. Dykes has been Senior Vice President and General
Counsel of FirstWorld since January 1999 and is responsible for all of our
legal affairs. In March 1999, Mr. Dykes was appointed Secretary of FirstWorld.
From February 1996 through January 1999, Mr. Dykes served in various
capacities in the legal department at ICG Communications, most recently as
Assistant General Counsel. From 1991 through 1995, Mr. Dykes served in various
positions at the Denver and Regional Offices of the Resolution Trust
Corporation, most recently as Senior Attorney. In 1997, Mr. Dykes received a
Certificate of Advanced Studies in Telecommunications from University College
at the University of Denver. Mr. Dykes obtained his law degree from the
University of Denver College of Law in 1981.
Marion K. Jenkins, Ph.D. Dr. Jenkins has been Senior Vice President of
Information Technology and Chief Information Officer of FirstWorld since
November 1998. For the previous two years, Dr. Jenkins held various executive
offices, most recently as Vice President of Strategic Client Applications at
Qwest Communications International, Inc., Vice President of Sales Operations
at LCI International and Chief Information Officer at U.S. Long Distance Corp.
Dr. Jenkins worked in these various positions as a result of the acquisition
of LCI by Qwest and the acquisition of USLD by LCI. Dr. Jenkins also served as
Vice President of Sales for American Telco, Inc. from 1986 through 1996. Dr.
Jenkins holds a Ph.D. degree in philosophy and a M.S. degree in mechanical
engineering from Stanford University, and a B.S. degree, with honors, in
mechanical engineering from Utah State University.
Douglas L. Kramer. Mr. Kramer has been Senior Vice President and Chief
Technical Officer of FirstWorld since December 1998. Mr. Kramer served in
various capacities for ICG Telecom for the previous six years, most recently
as Vice President of Planning. While at ICG Telecom, Mr. Kramer directed all
integrated planning; network, switch, SS7 and data planning and engineering;
switch provisioning; and industry code compliance. In addition, he was
responsible for developing and deploying ICG Telecom's 3,000-mile fiber based
network throughout nine states and was credited with deploying one of the
nation's largest IP networks. Prior to working at ICG Telecom, Mr. Kramer
directed network services for MidAmerican Communications, which was acquired
by MCI WorldCom in 1991.
Scott M. Chase. Mr. Chase has been our Senior Vice President of Corporate
and Government Affairs of FirstWorld since October 1998. In March 1999, Mr.
Chase was appointed Assistant Secretary of FirstWorld. Mr. Chase worked in
various capacities for ICG Communications from March 1997 to September 1998,
most recently as Vice President, Corporate Communications and Government
Affairs. After graduating from the University of Colorado in 1991 and until he
joined ICG Communications in March 1997, Mr. Chase served in various
government capacities and was actively involved in a number of local, state
and federal electoral campaigns, including serving as the Deputy Political
Director for the Colorado campaign to elect Clinton/Gore in 1992. During this
period, Mr. Chase also served as a senior policy and political advisor for
several public officials, including U.S. Senator Tim Wirth and former Governor
of Colorado Roy Romer.
Paul C. Adams. Mr. Adams has been Vice President of Finance and Treasurer
of FirstWorld since January 1999. In March 1999, Mr. Adams was appointed
Assistant Secretary of FirstWorld. From 1993 to 1998, Mr. Adams was employed
by Western Gas Resources, Inc., most recently as Controller. From 1987 to
1993, Mr. Adams was employed by PricewaterhouseCoopers LLP, most recently as
Manager of Business Assurance. Mr.
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Adams is the principal financial and accounting officer of FirstWorld. He
received a B.S. degree in Business from the University of Colorado in 1987 and
a B.A. degree in Economics from the University of Alberta in 1985. He is a
Certified Public Accountant.
C. Kevin Garland. Mr. Garland has been a director of FirstWorld and has
been a member of our Compensation Committee since January 1998 and a member of
the Equity Investment Committee since November 1999. Mr. Garland joined Enron
in 1995. He currently serves as Vice President of Equity Investments for a
division of Enron Communications, Inc. and is responsible for overseeing
minority and control investments in the communications area for Enron. From
June 1993 to December 1994, Mr. Garland served as senior associate in mergers
and acquisitions for Parker & Parsley, an independent oil and gas company.
Stephen R. Horn. Mr. Horn is a director of FirstWorld and has been a member
of the Audit Committee since June 1999. Mr. Horn was appointed to our board of
directors in April 1999 to fill the vacancy created by the resignation of Mr.
Rodney D. Malcolm. Mr. Horn has been a Vice President and Group Head of the
Principal Investments Group of Enron North America since 1996. Prior to 1996,
Mr. Horn was a principal of Yellowstone Energy Partners, a private equity
investing firm in Houston, Texas, where he commenced work in 1994. Mr. Horn
holds an M.B.A. degree from Harvard University and a B.S. degree from Texas
A&M University.
James O. Spitzenberger. Mr. Spitzenberger has been a director of FirstWorld
and a member of the Audit Committee since January 1998 and Chairman of the
Audit Committee since June 1999. Since July 1996, Mr. Spitzenberger has been a
private equity investor. Prior to July 1996, Mr. Spitzenberger was a Vice
President of Peter Kiewit Sons' Inc, which he joined in February 1981. While
at Peter Kiewit Sons' Inc., Mr. Spitzenberger served as Director of Taxation.
Prior to joining Peter Kiewit Sons' Inc, Mr. Spitzenberger was a tax manager
with Arthur Andersen LLP.
John C. Stiska. Mr. Stiska has been a director of FirstWorld since
September 1997, and was appointed a member of the Audit Committee in June
1999. Mr. Stiska currently is Chairman of Commercial Bridge Capital, LLC. From
February 1996 to February 1998, he served as Corporate Senior Vice President
and General Manager of the Technology Applications Division of QUALCOMM
Incorporated, a leading developer and manufacturer of telecommunications
technology. Prior to 1996, Mr. Stiska was President and then Chairman and
Chief Executive Officer of Triton Group Ltd., where he worked since 1990.
During that time, he also served on the board of directors of Triton's
subsidiaries, two of which were publicly traded: Mission West Properties and
Ridgewood Properties, Inc. Previously, Mr. Stiska practiced law for 20 years,
specializing in corporate law, mergers and acquisitions and securities law. In
July 1998, Mr. Stiska joined the law firm of Latham & Watkins as of-counsel.
Mr. Stiska serves on the board of directors of several companies, including
Laser Power Corporation, a publicly traded company.
Melanie L. Sturm. Ms. Sturm has been a director of FirstWorld and a member
of our Compensation Committee since January 1998. Ms. Sturm is a private
equity investor and currently serves on the board of directors of MD Network,
a private healthcare concern, and Little Switzerland, Inc., a publicly traded
duty-free retailer. From 1990 to 1996, Ms. Sturm served as an Investment
Officer at International Finance Corporation, the private sector affiliate of
the World Bank. From 1984 to 1988, Ms. Sturm worked in the Mergers &
Acquisitions departments of Drexel, Burnham Lambert and Morgan Stanley. Ms.
Sturm graduated magna cum laude with a B.A. degree in International Relations
and a B.S. degree in Economics from Tufts University and has an M.B.A. degree
from INSEAD of Fontainebleau, France. Ms. Sturm is Donald L. Sturm's daughter.
Messrs. Sturm and Spitzenberger and Ms. Sturm were appointed to our board
of directors as the three directors that the Spectra 1, Spectra 2 and Spectra
3 are entitled to appoint under the securityholders agreement discussed below.
Likewise, Messrs. Garland and Horn were appointed to the board of directors as
the two directors that Enron is entitled to appoint pursuant to the
securityholders agreement. Mr. Stiska is the board member elected by the
holders of the Series B common stock.
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Board Structure
We currently have seven authorized directors. Our current certificate of
incorporation provides that six of the members of our board shall be elected
by the holders of the Series A common stock and Series B common stock, voting
together as a class (currently held by Messrs. Sturm, Ohringer, Garland,
Spitzenberger, Horn and Ms. Sturm) and that one of the members of the board of
directors shall be elected by the holders of the Series B common stock
(currently held by Mr. Stiska). Members of the board of directors currently
hold office and serve until our next annual meeting of stockholders or until
their respective successors have been elected. See "Description of Capital
Stock." Prior to the completion of this offering, the board intends to
nominate for election two additional "independent directors" within the
meaning of NASD regulations.
Committees of the Board
Chairman's Committee. Our chairman's committee consists of Messrs. Sturm,
Ohringer and Garland. The chairman's committee is empowered to conduct all
activities that may be conducted by the board of directors, subject only to
limitations imposed by applicable corporation law.
Compensation Committee. Our compensation committee consists of Ms. Sturm
and Mr. Garland. The compensation committee reviews salaries, bonuses and
stock options of our executive officers, administers our executive
compensation policies, stock option plans and the bonus program and makes
recommendations to the board for approval of certain actions.
Audit Committee. Our audit committee consists of Messrs. Spitzenberger,
Horn and Stiska. The audit committee is primarily concerned with the
effectiveness of our accounting policies and practices, financial reporting
and internal controls. Specifically, the audit committee: makes
recommendations to the board of directors on appointing our independent public
accountants; reviews and approves the scope of the annual examination of our
books and records; reviews the audit findings and changes recommended by the
independent public accountants; monitors the extent to which we have
implemented changes recommended by the independent public accountants or the
audit committee; and provides oversight with respect to accounting principles
to be employed in our financial reporting.
Equity Investment Committee. Our Equity Investment Committee consists of
Messrs. Ohringer and Garland. The committee is empowered to make all decisions
regarding the Sturm equity investment agreement, exercise the exercise our
rights and perform other necessary actions under that agreement.
Director Compensation
Directors who are also our employees receive no directors' fees. Mr.
Stiska, one of our non-employee directors, receives a retainer of $1,000 per
month and options to purchase 5,000 shares of Series B common stock per year
under our 1997 Stock Option Plan. All non-employee directors are reimbursed
for their reasonable out-of-pocket travel expenditures. Our directors are also
eligible to receive grants of stock options under our 1997 Stock Option Plan.
Corporate Managers, LLC, a Colorado limited liability company, receives an
annual management fee of $500,000 plus out of pocket expenses. Corporate
Managers is an affiliate of the Sturm Entities, which are controlled by Mr.
Sturm and in which Mr. Spitzenberger owns membership interests. Messrs.
Garland and Horn are officers of Enron, which also receives an annual
management fee of $500,000 plus out of pocket expenses. Corporate Managers and
Enron receive these management fees under a three-year contract, which
commenced on January 1, 1998. See "Certain Transactions--December 1997 Equity
Investment--Management Services Agreements."
Compensation Committee Interlocks and Insider Participation
During fiscal 1998, FirstWorld's Compensation Committee consisted of Mr.
Garland and Ms. Sturm. Mr. Garland is an officer of an Enron affiliate. As
such, Mr. Garland has an indirect interest in the arrangements and
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relationships between FirstWorld and Enron and its affiliates. For information
about these arrangements and relationships, please see "Certain Transactions--
December 1997 Equity Investment."
Employment Agreements
We have employment agreements with Sheldon S. Ohringer, David J. Gandini,
Jeffrey L. Dykes, Marion K. Jenkins, Douglas L. Kramer, Scott M. Chase and
Paul C. Adams, among others.
Sheldon S. Ohringer
We entered into an employment agreement on September 28, 1998, as amended
May 20, 1999, with Sheldon S. Ohringer pursuant to which Mr. Ohringer agreed
to join FirstWorld as our President and Chief Executive Officer on October 1,
1998. This employment agreement has a three year term ending on September 30,
2001 and thereafter will automatically renew for one year periods, unless
terminated earlier by either party. It also provides that Mr. Ohringer will be
nominated to serve as a director of FirstWorld during the term of the
agreement. The agreement provides for an initial annual base salary of
$200,000 which will be reviewed annually beginning October 1999, and an annual
cash bonus of not more than 50% of Mr. Ohringer's base salary. Also, to
compensate Mr. Ohringer for certain benefits that he would have received from
his previous employer, we have agreed to pay Mr. Ohringer a cash payment of
$4.0 million in three separate installments. The first installment in the
amount of $2.0 million was paid on October 1, 1998, the second $1.0 million
installment was paid on October 1, 1999 and the final $1.0 million installment
is due on October 1, 2000. Under his employment agreement, Mr. Ohringer must
be employed by FirstWorld on the date an installment becomes due to be
eligible to receive the installment payment unless FirstWorld terminates Mr.
Ohringer's employment other than for cause or Mr. Ohringer terminates his own
employment for good reason prior to the installment date. In addition, Mr.
Ohringer may elect to receive all or any portion of the third installment
payment in the form of Series B common stock, in which case the stock will be
valued at $7.50 per share, respectively.
In addition, under his employment agreement, Mr. Ohringer will be eligible
for the following bonuses:
Initial Public Offering Bonus. If we complete an initial public offering
with gross proceeds to FirstWorld of at least $20.0 million, referred to below
as a qualified public offering, with a price of at least $10.00 per share
before April 1, 2000, we will pay Mr. Ohringer a single sum of $1.0 million as
a cash bonus.
Deferred Cash Bonus. In addition to the initial public offering bonus
discussed above, Mr. Ohringer may be entitled to receive the following
compensation:
(i) If we complete a qualified public offering with a price of at least
$10.00 per share before April 1, 2000, we will pay Mr. Ohringer a $4.2
million cash bonus on September 30, 2001.
(ii) If we complete a qualified public offering with a price of at least
$12.50 per share before October 1, 2000, we will pay Mr. Ohringer an $8.4
million cash bonus on September 30, 2001 instead of the bonus described in
paragraph (i).
(iii) If FirstWorld's Series B common stock trades at a price in excess
of $20.00 for a period of 20 consecutive trading days prior to October 1,
2001, then on September 30, 2001 we will pay Mr. Ohringer a cash payment
equal to $16.8 million minus any amounts he receives under paragraph (i) or
(ii) above.
The payments described in paragraphs (i), (ii) and (iii) above are referred
to as the "deferred cash bonus." Upon a change of control or the termination
of Mr. Ohringer's employment by FirstWorld without cause, voluntarily by Mr.
Ohringer for good reason or upon his death, any deferred cash bonus previously
earned by Mr. Ohringer that has not yet been paid shall be paid within 30 days
of the date of termination. In no event will the termination of Mr. Ohringer's
employment, including termination by FirstWorld for cause or disability or Mr.
Ohringer's voluntary termination of his employment without good reason, affect
Mr. Ohringer's right to receive the deferred cash bonus earned prior to that
termination.
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Mr. Ohringer also has been granted an option to purchase 2,805,000 shares
of Series B common stock at an exercise price of $6.00 per share, subject to
anti-dilution protections set forth in his employment agreement. The option
has a term of seven years from October 1, 1998 and vested with respect to one-
third of the shares on October 1, 1998 and 1999, and will vest with respect to
the remaining one-third on October 1, 2000. In addition, all of the shares
subject to the option shall immediately vest (i) immediately prior to a change
of control, (ii) if FirstWorld's Series B common stock trades at a price in
excess of $20.00 for a period of 20 consecutive trading days prior to October
1, 2001, or (iii) if Mr. Ohringer is terminated by FirstWorld without cause or
Mr. Ohringer voluntarily terminates his employment with FirstWorld for good
reason. Subject to certain exceptions, Mr. Ohringer has agreed to hold 40% of
the shares he acquires upon exercise of the option for at least one year from
the date of exercise.
Mr. Ohringer also has been granted a right of first refusal which allows
him to maintain his percentage ownership interest, assuming the exercise in
full of the option described above, with respect to certain future equity
issuances. This right of first refusal terminates on the earlier of (i)
January 31, 2004, (ii) the day immediately prior to the closing of a qualified
public offering or (iii) the date of his termination. Mr. Ohringer may also
participate in the employee benefit plans generally available to other
executive officers of FirstWorld.
Depending on how Mr. Ohringer's employment with FirstWorld terminates, Mr.
Ohringer or his estate may be eligible to receive certain termination payments
and Mr. Ohringer or his family and dependents would also be entitled to
continuation of certain benefits for a specified period of time. In addition,
if Mr. Ohringer's employment is terminated by FirstWorld without cause or by
Mr. Ohringer for good reason, FirstWorld will pay Mr. Ohringer a severance
payment equal to two times his annual base salary and bonus plus certain
accrued vacation, all options awarded to him will fully vest and the non-
compete covenant discussed below will not apply.
Mr. Ohringer is subject to a one year non-compete covenant if his
employment is terminated by FirstWorld for cause or for disability or if Mr.
Ohringer voluntarily terminates his employment without good reason.
Other Employment Agreements
The employment agreements we have entered into with certain of the our
other key executive officers provide for annual salaries and eligibility for a
bonus based on a certain percentage of each executive's annual salary. In
addition, under the employment agreements, we typically grant the executive an
option to acquire a certain number of shares of Series B common stock. The
shares subject to the option generally vest in four equal installments on the
first, second, third and fourth anniversaries of the executive's start date
with FirstWorld and have exercise prices ranging from $4.50 to $7.50 per
share. If we terminate an executive's employment during the term of his
employment agreement without cause or the executive terminates his employment
with us for good reason the executive would generally be entitled to receive a
severance payment from us.
In certain instances the employment agreements also provide for cash
payments of up to $500,000, referred to as equalization payments, to
compensate an executive for certain benefits that he would have received from
his previous employer. In some instances these equalization payments are
payable in three annual installments. If an equalization payment is payable in
installments, the executive must be employed by FirstWorld on the date an
installment becomes due to be eligible to receive the installment payment,
unless FirstWorld terminates the executive's employment other than for cause
or the executive terminates his own employment for good reason prior to the
installment date.
Executive Compensation
The following table sets forth all compensation awarded to, earned by or
paid to the three people who served as our Chief Executive Officer and our
four other most highly compensated executive officers whose annual salary and
bonus exceeded $100,000 for services rendered in all capacities to us during
1998 (collectively, the "named
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executive officers"). Due to a change in FirstWorld's fiscal year, the
information presented in the table includes overlapping periods. The
information provided with respect to the 12 month period ended December 31,
1998 includes compensation that also appears in the information provided with
respect to the 12 month period ended September 30, 1998 and vice versa.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation (1) Compensation
----------------------------------- ------------
Twelve Other Annual Securities
Name and Principal Months Compensation Underlying All Other
Position(s) Ended Salary ($) Bonus ($) ($) Options (#) Compensation
- ------------------ -------- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sheldon S. Ohringer(2).. 12/31/98 50,006 2,000,000(3) 2,805,000
President and Chief
Executive Officer
Donald L. Sturm(4)...... 12/31/98 0(5)
Former Chief Executive
Officer 9/30/98 0(5)
Renney Senn(6).......... 12/31/98 0 16,417 72,443(7)
Former Chief 9/30/98 26,666 72,443(7)
Executive Officer 9/30/97 223,022
John Lewis(8)........... 12/31/98 152,800 40,000
Former Senior Vice
President, 9/30/98 139,167 2,000 56,417
Network and Operations 9/30/97 130,000 14,000
Dennis M. Mulroy(9)..... 12/31/98 140,000 10,000
Former Vice President, 9/30/98 131,667 26,417
Finance and
Administration 9/30/97 80,087 50,000
Robert E. Randall(10)... 12/31/98 200,000 100,000
Former Executive Vice
President 9/30/98 176,667 116,417
and former acting Chief 9/30/97 199,063 41,085
Financial Officer
Robert Cerasoli(11)..... 12/31/98 105,000 16,417 59,099(12)
Former Senior Vice
President, 9/30/98 131,667
Communications and
Public 9/30/97 184,688 40,463
Policy
</TABLE>
- --------
(1) Other compensation in the form of perquisites and other personal benefits
has been omitted in those cases where the aggregate amount of such
perquisites and other personal benefits constituted less than the lesser
of $50,000 or 10% of total annual salary and bonus for the Named Executive
Officers for such year.
(2) Mr. Ohringer became FirstWorld's Chief Executive Officer on October 1,
1998.
(3) Pursuant to the terms of Mr. Ohringer's employment agreement Mr. Ohringer
is entitled to a cash payment of $4.0 million for certain benefits that he
would have been eligible to receive from his former employer. The cash
payment of $4.0 million is payable in three separate installments, the
first installment in the amount of $2.0 million was paid to Mr. Ohringer
on October 1, 1998 and the second installment was paid to Mr. Ohringer on
October 1, 1999.
(4) Mr. Sturm served as Chief Executive Officer of FirstWorld from March 17,
1998 through September 30, 1998. Effective September 30, 1998, Mr. Sturm
resigned his position as Chief Executive Officer of FirstWorld in order to
allow Mr. Ohringer to assume the position.
(5) The Company pays annual management fees to Corporate Managers, an
affiliate of Mr. Sturm, pursuant to the management consulting services
agreement between FirstWorld and Corporate Managers, as amended. See
"Certain Relationships and Related Transactions--December 1997 Equity
Investment--Management Services Agreements."
(6) Mr. Senn resigned from FirstWorld in January 1998.
(7) In connection with Mr. Senn's resignation, Mr. Senn received approximately
$12,231 less applicable federal and state taxes for accrued vacation days.
In addition, pursuant to an employee severance program
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adopted in connection with the December 1997 equity investment, FirstWorld
paid severance payments to Mr. Senn in an aggregate amount of $60,212.
(8) Mr. Lewis resigned from FirstWorld in January 1999.
(9) Mr. Mulroy resigned from FirstWorld in April 1999.
(10) Mr. Randall resigned from FirstWorld in December 1998.
(11) Mr. Cerasoli resigned from FirstWorld in September 1998.
(12) In connection with Mr. Cerasoli's resignation, he received approximately
$24,099 less applicable federal and state taxes for accrued vacation
days. In addition, FirstWorld paid severance payments to Mr. Cerasoli in
an aggregate amount of $35,000 pursuant to a negotiated severance
agreement.
We have recently undergone significant changes in our management structure.
Based on 1999 salaries, our five most highly compensated executive officers,
their 1999 base salary, their target discretionary bonus amount expressed as a
percentage of base salary, if available, and any signing bonus received are as
follows:
<TABLE>
<CAPTION>
Base Discretionary Signing
Salary Bonus Bonus
-------- ------------- ----------
<S> <C> <C> <C>
Sheldon S. Ohringer
President, Chief Executive Officer and
Director................................... $200,000 50% $4,000,000
David J. Gandini
Executive VP................................ 185,000 40 500,000
Jeffrey L. Dykes
Senior VP, General Counsel and Secretary.... 160,000 35 30,000
Marion K. Jenkins
Senior VP--Information Technology and Chief
Information Officer........................ 160,000 50 --
Douglas L. Kramer
Senior VP and Chief Technology Officer...... 135,000 35 30,000
</TABLE>
Option Grants During 1998
The following table sets forth certain information with respect to options
to purchase Series B common stock granted during the twelve-month period ended
December 31, 1998 to certain of our executive officers. There were no stock
appreciation rights outstanding as of December 31, 1998.
<TABLE>
<CAPTION>
Number of % of Total Potential Realizable
Securities Options Granted Exercise Value at Assumed
Underlying to Employees Price Annual Rates of Stock
Options Granted in Fiscal Year per Share Expiration Price Appreciation
Name (#) (%) ($/SH) Date for Option Term
---- --------------- --------------- ---------- ---------- ----------------------
5% 10%
----------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sheldon S. Ohringer..... 2,805,000 73.59% $6.00 9/30/05 $6,851,500 $15,966,909
Donald L. Sturm......... -- -- -- -- -- --
Renney Senn............. -- -- -- -- -- --
John Lewis.............. 40,000 1.05 4.50 6/2/08 150,935 382,498
Dennis M. Mulroy........ 10,000 0.26 4.50 6/1/08 37,734 95,625
Robert E. Randall....... 100,000 2.62 4.50 6/1/08 377,337 956,246
Robert Cerasoli......... -- -- -- -- -- --
</TABLE>
- -------
Messrs. Lewis, Mulroy and Randall resigned from FirstWorld in January 1999,
April 1999 and December 1998, respectively.
Options were granted at an exercise price equal to or greater than the fair
market value of our Series B common stock. Exercise prices are determined by
our board of directors on the date of grant.
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The 5% and 10% assumed annual rates of compounded stock price appreciation
shown above are mandated by rules of the SEC. These values do not take into
account amounts required to be paid as income taxes and any applicable state
laws or option provisions providing for termination of an option following
termination of employment, non-transferability or vesting, and do not reflect
our estimate of future stock price growth, if any, of the shares of Series B
common stock.
Options Exercised During 1998 and Option Values
The following table sets forth certain information with respect to the
exercise of options to purchase Series B common stock during the twelve-month
period ended December 31, 1998, and the unexercised options held and the value
thereof at that date, for each of the named executive officers.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Shares Options at Fiscal Year the-Money Options at
Acquired Value End(#) Fiscal Year End($)
on Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sheldon S. Ohringer..... -- -- 935,000 1,870,000 -- --
Donald L. Sturm......... -- -- -- -- -- --
Renney Senn............. 16,417 17,074 -- -- -- --
John Lewis.............. -- -- 51,617 54,800 202,251 156,000
Dennis M. Mulroy........ 5,000 27,500 38,417 38,000 162,251 177,000
Robert E. Randall....... -- -- 36,417 80,000 79,251 120,000
Robert Cerasoli......... 16,417 49,251 -- -- -- --
</TABLE>
- --------
In the table above, the value of unexercised in-the-money options is based
on the fair market value of our Series B common stock as of December 31, 1998
(determined by the board of directors to be $6.00 per share), minus the per
share exercise price, multiplied by the number of shares underlying the
option. The realized value of shares acquired is calculated by determining the
difference between the fair market value of the securities underlying the
options at the respective date of exercise as determined by the board of
directors ($4.04 per share for the shares acquired by Mr. Senn and $6.00 per
share for the shares acquired by Mr. Mulroy and Mr. Cerasoli) and the exercise
price of the options.
Stock Option Plans, Stock Purchase Plans and Bonus Program
As of the closing of this offering we have six stock option and stock
purchase plans currently in place: the 1995 Stock Option Plan, the 1997 Stock
Option Plan and the 1999 Equity Incentive Plan, the 1998 Stock Purchase Plan,
the 1999 Employee Stock Purchase Plan and the Quarterly Bonus Program. We also
offer our employees the opportunity to participate in our 401(k) Plan.
1995 Stock Option Plan. Under the SpectraNet International 1995 Stock
Option Plan we are authorized to issue incentive stock options to acquire up
to an aggregate of 1,500,000 shares of Series B common stock. Subject to the
limitations set forth in the 1995 Stock Option Plan, the board of directors or
a committee thereof comprised of at least three board members has the
authority, subject to certain limitations, to select the employees of
FirstWorld or its subsidiaries to whom grants are made, to designate the
number of shares to be covered by each option, to establish vesting schedules,
and to specify other terms of the options. No person will be granted an option
to the extent that the aggregate fair market value of the shares for which
such option is exercisable for the first time by the optionee during a
calendar year exceeds $100,000. Generally, options vest over a four and one
half year period and expire ten years from the date of grant. Options granted
under the 1995 Stock Option Plan are nontransferable and expire 90 days after
the termination of an optionee's employment with FirstWorld, unless such
optionee's service with FirstWorld is terminated by death or disability, in
which case the options expire six months and one year, respectively. Upon the
occurrence of a sale, merger or consolidation, where FirstWorld is the
surviving corporation, each option issued under the 1995 Stock Option Plan
will terminate,
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unless those options are assumed by FirstWorld; provided, that upon a merger
or consolidation, if such options are not assumed by FirstWorld, the optionee
may exercise his or her options to the extent already vested, until 15 days
prior to the merger or consolidation transaction. Upon the occurrence of a
merger or consolidation where FirstWorld is not the surviving corporation,
each option issued under the 1995 Stock Option Plan, to the extent not already
vested, will vest 30 days prior to that transaction unless assumed by the
successor corporation. As of November 30, 1999, options to purchase an
aggregate of 66,800 shares of Series B common stock at prices ranging from
$0.25 to $4.50 were outstanding under the 1995 Stock Option Plan and 226,900
shares remained available for future grant under this plan.
1997 Stock Option Plan. Under the SpectraNet International 1997 Stock
Option Plan we are authorized to issue an aggregate of 1,500,000 options to
purchase Series B common stock. The 1997 Stock Option Plan provides for the
grant of incentive stock options and nonqualified stock options and the award
of stock purchase rights. Subject to the terms and conditions of the 1997
Stock Option Plan and applicable law, the board of directors or a duly
appointed committee of the board has the authority to determine, among other
things, which employees, officers, directors or consultants should be awarded
options, the type of options to be awarded, the number of shares covered by
option awards, the exercise price applicable to options awarded and the
vesting schedule of such options. Generally, options granted to officers,
directors and consultants will become exercisable at a rate of not less than
20% per year over a period of five years from their date of grant. Options
awarded under the 1997 Stock Option Plan are nontransferable and generally
expire ten years from the date of grant. Unless otherwise indicated in the
applicable stock option agreement, the vested portion of options awarded
pursuant to the 1997 Stock Option Plan will remain exercisable for three
months after the termination of the optionee's service to FirstWorld. However,
if the optionee's service to FirstWorld ends because of death or disability,
unless otherwise indicated in the stock option agreement, the optionee has 12
months to exercise the vested portion of his or her options. In the event of a
merger or sale of substantially all of the assets of FirstWorld, all
outstanding options and stock purchase rights will be assumed or substituted
with an equivalent number of options or rights from the successor corporation,
and in the event that the successor corporation refuses to assume or
substitute the options or the stock purchase rights, the option or right will
become fully vested, whether exercisable or not, for a period of 15 days from
the date that the optionee receives notice that the options and rights have
accelerated. The 1997 Stock Option Plan also provides that the board or the
committee may, at any time, offer to buy out, for a payment in cash or shares,
an option previously granted to any optionee on such terms and conditions as
they may determine. As of November 30, 1999, options to purchase an aggregate
of 629,137 shares of Series B common stock at exercise prices ranging from
$3.00 to $7.50 were outstanding under the 1997 Stock Option Plan and 547,227
remained available for future grant under this plan. The 1997 Stock Option
Plan does not contain any provisions as to maximum number of options or stock
purchase rights that may be granted to any one individual, and will terminate
ten years from the date it was adopted by the Board.
1999 Equity Incentive Plan. Under our 1999 Equity Incentive Plan we are
authorized to issue options to purchase up to 5,000,000 shares of our Series B
common stock. The 1999 Equity Incentive Plan provides for the grant of
incentive stock options, nonqualified stock options and stock appreciation
rights. Subject to limitations contained in the 1999 Equity Incentive Plan and
approval by the board of directors, the compensation committee of the board of
directors determines which of our employees or consultants are to receive
grants under the 1999 Equity Incentive Plan, designate the number of options
or stock appreciation rights to be granted, and make any decisions necessary
to administer the plan. No more than 500,000 options can be granted to any
individual under the terms of the 1999 Equity Incentive Plan. Unless the board
determines otherwise, payment upon the exercise of any options or stock
appreciation rights must be made in cash at the time of exercise. Prior to a
public offering of FirstWorld, options granted under the plan are non-
transferable and expire 90 days after an employee or consultant relationship
with the company is terminated for any reason other than for death, disability
or cause. After a public offering of First World, options will expire 30 days
after an employee or consultant relationship with the company is terminated
for any reason other than for death, disability or cause. Where, however, the
employee or consultant relationship is terminated for cause, the board of
directors or a committee, in its
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discretion, may terminate the optionee's right to exercise his or her option.
Where the optionee dies or becomes disabled, the optionee will have 12 months
to exercise his or her options. Options generally vest over a period of not
more than four years, and expire five or seven years after the grant date,
based on compliance with certain securities laws. In the event of a change in
control, the board of directors may provide (i) that all awards granted under
the 1999 Equity Incentive Plan become fully exercisable, or (ii) that the
resulting or surviving corporation assume the awards granted, or (iii) that
the surviving corporation substitute such awards for an option to purchase its
shares on the same terms and conditions. As of November 30, 1999, options
covering an aggregate of 3,085,175 shares of FirstWorld's Series B common
stock were outstanding under the 1999 Equity Incentive Plan at exercise prices
ranging from $6.00 to $7.50. In addition, as of November 30, 1999, stock
appreciation rights covering an aggregate of 589,825 shares of our Series B
common stock were outstanding under the 1999 Equity Incentive Plan, and
1,914,825 shares remained available for future grant under the 1999 Equity
Incentive Plan. The 1999 Equity Incentive Plan became effective on March 8,
1999 and terminates automatically on March 8, 2004, unless it is terminated
sooner. In December 1999, the board approved the conversion of stock
appreciation rights into options as of the date of this offering.
1998 Stock Purchase Plan. Under our 1998 Stock Purchase Plan we are
authorized to issue rights to purchase up to 500,000 shares of our Series B
common stock to directors and employees. Administration of the 1998 Stock
Purchase Plan has been delegated to the compensation committee of the board of
directors, subject to certain limitations. That committee may determine the
offerees to whom purchase rights are to be granted, the number of such rights
to be granted, the price per share of the purchase rights and the time limit
for exercise of the purchase rights. Shares granted under the 1998 Stock
Purchase Plan may be purchased using a promissory note for up to 50% of the
purchase price of the stock. If the purchaser elects to use a promissory note
as any part of the purchase price, the shares purchased must be pledged to
secure that note. In September 1998, FirstWorld offered rights to purchase an
aggregate of 300,000 shares of Series B common stock to 17 offerees. Prior to
the stated expiration of the stock purchase rights in November 1998, five
employees purchased 42,250 shares of Series B common stock at a price of $4.50
per share. No stock purchase rights have been granted under the 1998 Stock
Purchase Plan since September 1998. The 1998 Stock Purchase Plan has a term of
ten years and terminates automatically on September 18, 2008 unless it is
terminated sooner.
1999 Employee Stock Purchase Plan. In December 1999 the board adopted the
1999 Employee Stock Purchase Plan covering an aggregate of 1,000,000 shares of
common stock. The 1999 Employee Stock Purchase Plan is intended to qualify as
an "employee stock purchase plan" within the meaning of Section 423 of the
Internal Revenue Code. Under the 1999 Employee Stock Purchase Plan, the board
may authorize participation by eligible employees, including officers, in
periodic offerings following the adoption of the 1999 Employee Stock Purchase
Plan. The 1999 Employee Stock Purchase Plan is administered by the board or a
committee authorized by the board to act on its behalf.
The 1999 Employee Stock Purchase Plan provides a means by which employees
of FirstWorld may purchase Series B common stock through payroll deductions.
The 1999 Employee Stock Purchase Plan is implemented by offering rights to
purchase to eligible employees. The first offering will begin on the effective
date of the initial public offering and will end on January 31, 2001.
Purchases will occur on January 31, 2000, July 31, 2000 and on each subsequent
January 31 and July 31 thereafter. Unless otherwise determined by the board,
Series B common stock is purchased for accounts of employees participating in
the 1999 Employee Stock Purchase Plan at a price per share equal to the lower
of (i) 85% of the fair market value of a share of Series B common stock on the
first offering date of each purchase period or (ii) 85% of the fair market
value of a share of Series B common stock on the date of purchase.
Generally, all regular employees, including executive officers, who work at
least 20 hours per week and are employed by FirstWorld or by an affiliate of
FirstWorld for at least five months per calendar year may participate in the
1999 Employee Stock Purchase Plan and may authorize payroll deductions of up
to 15% of their base compensation for the purchase of Series B common stock
under the 1999 Employee Stock Purchase Plan.
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<PAGE>
Eligible employees may be granted rights only if the rights, together with
any other rights granted under any FirstWorld employee stock purchase plan, do
not permit such employee to purchase stock of FirstWorld with a fair market
value in excess of $25,000 for each calendar year in which such rights are
outstanding. In addition, no employee will be eligible for the grant of any
rights under the 1999 Employee Stock Purchase Plan if immediately after such
rights are granted, such employee would have voting power of more than 5% of
the outstanding capital stock of FirstWorld.
Where the employee's employment terminates for any reason, the employee's
rights under the 1999 Employee Stock Purchase Plan will immediately terminate
and FirstWorld will distribute to the employee all of his or her accumulated
payroll deductions, without interest. In the event of certain changes of
control, the board has discretion to provide that each right to purchase
Series B common stock will be assumed or an equivalent right substituted by
the successor corporation, or the board may shorten the offering period and
provide for all sums collected by payroll deductions to be applied to purchase
stock immediately prior to the change in control. The 1999 Employee Stock
Purchase Plan will terminate at the direction of the board or when all of the
shares reserved for issuance have been purchased.
Quarterly Bonus Program. Our Quarterly Bonus Program was adopted by the
board of directors on May 3, 1999 and amended in December 1999. The bonus plan
is administered by the compensation committee. Eligible participants include
employees who are scheduled to work 40 or more hours per week. Temporary
contract employees are not eligible to participate in the bonus plan. This
bonus plan is intended to lead to increased individual productivity and
employee retention. A bonus earned by each eligible employee in the bonus plan
is based in part on the productivity of that participant's profit and loss
center and in part on that participant's individual performance. Year end
bonuses, in addition to the fourth quarter bonus, include an amount equal to
the sum of the recipient's first quarter, second quarter and third quarter
bonuses. A recipient must be employed by FirstWorld on the day the bonus check
is issued in order to be eligible to receive a bonus. If however, the
participant's employment is terminated due to a reduction in force (as defined
in the bonus plan), the participant will be entitled to a pro rata share of
any bonus for which he or she would otherwise qualify for under the bonus
plan. We incurred expenses of approximately $613,000 and $1.6 million for the
three and nine months ended September 30, 1999, respectively. Certain
executive officers may elect to receive shares of stock in FirstWorld in lieu
of a cash bonus payment under the bonus plan. An aggregate of 200,000 shares
of Series B common stock will be available for issuance under the bonus plan
for this purpose. As of November 30, 1999, 10,560 shares of Series B common
stock had been issued under the Quarterly Program. The bonus plan was amended
by the board in December 1999 for the year 2000 to provide that the bonus
earned will be based on FirstWorld's overall year-to-date performance rather
than the participant's profit and loss center as measured on a quarter-by-
quarter stand-alone basis.
401(k) Plan. On November 1, 1998, we adopted a 401(k) retirement plan,
pursuant to which eligible employees may elect to defer up to 20% of their
compensation into the 401(k) Plan up to a maximum of $10,000 per annum. The
401(k) Plan also stipulates that we may provide discretionary matching
contributions to the participants of the 401(k) Plan, which matching
contributions would be allocated to the participants as of December 31 of each
401(k) Plan year and would vest to the participants at the rate of 25% per
year of service. All administrative expenses of the 401(k) Plan will be borne
by us. On December 13, 1999, the board approved a matching contribution in
cash in the amount equal to 50% of each participant contribution to the 401(k)
Plan, up to a maximum contribution of 6% of the participant eligible
compensation for the 1999 plan year. Matching contributions in future plan
years will be made at the discretion of the board.
Annual Grant of Stock Options and Stock Appreciation Rights. On December
13, 1999, our board of directors approved an annual grant of stock options and
stock appreciation rights under our 1999 Equity Incentive Plan to our eligible
employees. Their stock options and stock appreciation rights will be granted
in 1999 and, at the discretion of the board, each subsequent year based on the
position and individual performance of the eligible employee within FirstWorld
in the respective year.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock as of November 30, 1999 for:
. each person known to us to own beneficially more than 5% of the common
stock;
. each of our directors;
. each of the executive officers named in the summary compensation table;
and
. all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
Series A Common Stock(1) Series B Common Stock(1) Total Common Stock(1)
------------------------------- ------------------------------- ------------------------------- % of
Percent of Class Percent of Class Percent of Equity Voting
No. of ------------------ No. of ------------------ No. of ------------------ Power
Shares Prior to Following Shares Prior to Following Shares Prior to Following Following
Beneficially the the Beneficially the the Beneficially the the the
Owned Offering Offering Owned Offering Offering Owned Offering Offering Offering
------------ -------- --------- ------------ -------- --------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Donald L.
Sturm(2)....... 5,000,000 49.33% 49.33% 15,258,349 52.13% % 20,258,349 51.41% % %
Enron Corp.(3).. 5,000,000 49.33 49.33 11,472,166 42.68 16,476,166 44.50
C. Kevin
Garland(4)..... 0 * * 0 * 0 *
Stephen R.
Horn(5)........ 0 * * 0 * 0 *
Sheldon S.
Ohringer(6).... 0 * * 1,870,000 9.12 1,870,000 6.10
James O.
Spitzenberger(7).. 0 * * 0 * 0 *
John C.
Stiska(8)...... 0 * * 35,000 * 35,000 *
Melanie L.
Sturm(9)....... 0 * * 0 * 0 *
John Lewis(10).. 0 * * 77,769 * 77,769 *
Robert
Cerasoli(11)... 0 * * 342,417 1.84 342,417 1.19
Renney
Senn(12)....... 0 * * 882,274 4.73 882,274 3.07
Robert E.
Randall(13).... 0 * * 489,748 2.63 489,748 1.70
Dennis
Mulroy(14)..... 0 * * 66,417 * 66,417 *
All directors
and executive
officers as
a group (13 persons)
(15)........... 5,000,000 49.33% 49.33% 17,417,908 55.57% % 22,417,908 53.96% % %
</TABLE>
- --------
* Less than one percent beneficially owned
(1) In accordance with SEC rules, the table gives effect to the shares of
common stock that could be issued upon the exercise of outstanding options
and warrants prior to January 29, 1999. Unless otherwise noted in the
footnotes to the table and subject to community property laws where
applicable, the individuals have sole voting and investment control with
respect to the shares beneficially owned by them. Unless otherwise
indicated, the business address for each of the individuals or entities
listed below is c/o FirstWorld Communications, Inc., 8390 E. Crescent
Parkway, Suite 300, Greenwood Village, Colorado 80111. In accordance with
SEC rules, a person is deemed to be a "beneficial owner" of a security if
he or she has or shares the power to vote or direct the voting of such
security or the power to dispose or direct the disposition of such
security. More than one person may be deemed to be a beneficial owner of
the same
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<PAGE>
securities. The percentage ownership of each stockholder is calculated
based on the total number of outstanding shares of Series A common stock
and Series B common stock as of October 31, 1999 and those shares of
Series A common stock or Series B common stock that may be acquired by
such stockholder within 60 days of such date. Consequently, the
denominator for calculating such percentage may be different for each
stockholder. The table above is based upon information supplied by
directors, executive officers and principal stockholders. See "Description
of Capital Stock"
(2) Shares listed include: (a) 5,000,000 shares of Series A common stock held
of record by Colorado Spectra 3, LLC; (b) 1,392,757 shares of Series B
common stock held of record by Colorado Spectra 1, LLC; (c) 3,236,083
shares of Series B common stock held of record by Spectra 3; and (d)
10,629,509 shares of Series B common stock subject to currently
exercisable warrants held of record by Spectra 1, Colorado Spectra 2, LLC.
Spectra 1, 2 and 3 are referred to as the "Sturm Entities." Beneficial
ownership of the foregoing shares is attributable to Mr. Sturm because he
is the managing member of the Sturm Entities and is therefore deemed to
exercise voting power and investment authority with respect to the shares.
(3) Shares listed include: (a) 5,000,000 shares of Series A common stock held
of record by Sundance Assets, L.P., an affiliate of Enron; (b) 3,236,083
shares of Series B common stock held of record by Sundance Assets; and (c)
8,236,083 shares of Series B common stock subject to currently exercisable
warrants held of record by Sundance Assets.
(4) Excludes the securities owned by Sundance Assets described in Footnote (3)
above. Mr. Garland is an officer of Enron Communications, Inc., a Delaware
corporation and an affiliate of Enron Corp., but disclaims beneficial
ownership of the shares owned by its affiliate, Sundance Assets.
(5) Excludes the securities owned by Sundance Assets described in Footnote (3)
above. Mr. Horn is an officer of Enron North America Corp., but disclaims
beneficial ownership of the shares owned by its affiliate, Sundance
Assets.
(6) Shares listed include 1,870,000 shares of Series B common stock subject to
currently exercisable options held by Mr. Ohringer at an exercise price of
$6.00.
(7) Excludes shares of Series A common stock and Series B common stock
beneficially owned by the Sturm Entities (described in note 2). Mr.
Spitzenberger, together with trusts established for the benefit of Mr.
Spitzenberger's children, owns 10.0%, 10.0% and 6.67% of the membership
interests in Spectra 1, Spectra 2 and Spectra 3, respectively. Mr.
Spitzenberger disclaims beneficial ownership of such shares.
(8) Shares listed include: (a) 10,000 shares of Series B common stock held
directly by Mr. Stiska; and (b) 25,000 shares of Series B common stock
subject to currently exercisable options held by Mr. Stiska at an exercise
price of $3.00.
(9) Excludes shares of Series A common stock and Series B common stock
beneficially owned by the Sturm Entities (described in note 2). Ms. Sturm
owns membership interests in certain of the Sturm Entities, through a
revocable trust of which she is a co-trustee. Ms. Sturm disclaims
beneficial ownership of such shares.
(10) Shares listed include: (a) 64,417 shares of Series B common stock held of
record by John W. and Dorothy M. Lewis Family Trust; beneficial ownership
of such shares is attributable to Mr. Lewis because he is a trustee of
the John W. and Dorothy M. Lewis Family Trust and is therefore deemed to
exercise voting power and investment authority with respect to the
shares; (b) 567 shares of Series B common stock subject to currently
exercisable warrants held by Mr. Lewis at an exercise price of $3.53; and
(c) 12,785 held of record jointly by Mr. Lewis and his wife. Mr. Lewis'
address is 16742 Bermejo St., Canyon Country, CA 91351.
(11) Shares listed include: (a) 261,417 shares of Series B common stock held
directly by Mr. Cerasoli; (b) 11,000 shares of Series B common stock held
of record by Smith Barney, as IRA Custodian for Robert Cerasoli;
beneficial ownership of such shares is attributable to Mr. Cerasoli
because he has the power to direct the voting and investment of such
shares; (c) 40,000 shares of Series B common stock held of record by Mr.
Cerasoli's wife; (d) 10,000 shares of Series B common stock held by Mr.
Cerasoli as custodian for Anna Michel Cerasoli; (e) 10,000 shares of
Series B common stock held by Mr. Cerasoli as custodian for Christopher
R. Cerasoli; and (f) 10,000 shares of Series B common stock held by Mr.
Cerasoli as custodian for Evan Todd Cerasoli. Mr. Cerasoli's address is
3645 Bayside Walk, San Diego, CA 92109.
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<PAGE>
(12) Shares listed include 882,274 shares of Series B common stock held of
record jointly by Mr. Senn and his wife. Mr. Senn's address is 2307
Corina Circle, Escondido, CA 92029.
(13) Shares listed include: (a) 183,082 shares of Series B common stock held
of record by Randall Lamb Associates Profit Sharing Plan; beneficial
ownership of the shares is attributable to Mr. Randall because he has the
power to direct the voting and investment of the shares; (b) 5,000 shares
of Series B common stock held of record by Robert E. and Dianne M.
Randall as custodians for Natalie Marie Ray under the California Uniform
Transfers to Minors Act ("CUTMA") and 5,000 shares of Series B common
stock held of record by Robert E. and Dianne M. Randall as custodians for
Alexandra Dianne Ray under CUTMA; beneficial ownership of the shares is
attributable to Mr. Randall because he is a custodian of the minor
children and is therefore deemed to exercise voting power and investment
authority with respect to the shares; and (c) 296,666 shares of Series B
common stock held of record by Robert E. and Dianne M. Randall as
trustees of the Robert E. and Dianne M. Randall Family Trust, dated
2/3/97; beneficial ownership of such shares is attributable to Mr.
Randall because he is a trustee of the Robert E. and Dianne M. Randall
Family Trust and is therefore deemed to exercise voting power and
investment authority with respect to the shares. Mr. Randall's address is
4472 Heritage Glen Lane, San Diego, CA 92130.
(14) Mr. Mulroy's address is 470 Mensha Place, San Diego, CA 92130.
(15) See notes 3-9. Excludes shares held by Sundance Assets. Also excludes
shares held by John Lewis, Robert Cerasoli, Renney Senn, Robert E.
Randall and Dennis M. Mulroy, none of whom were employed by FirstWorld as
of October 31, 1999. Of the 17,417,908 shares of Series B common stock
beneficially owned by the directors and executive officers as a group,
9,559 shares of Series B common stock were acquired by certain executive
officers pursuant to FirstWorld's Quarterly Bonus Program.
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CERTAIN TRANSACTIONS
December 1997 Equity Investment
General. On December 30, 1997, we issued 5,000,000 shares of newly created
Series A common stock to each of Spectra 3 and ECT for $3.00 per share
pursuant to a common stock purchase agreement. We also issued for no
additional consideration warrants to purchase 5,000,000 shares of Series B
common stock at $3.00 per share to each of Spectra 3 and Enron. The Series A
common stock and Series B common stock are identical in all material respects,
except that the Series A common stock possesses ten votes per share on all
matters subject to a vote of stockholders while the Series B common stock
possesses one vote per share. See "Description of Capital Stock." Spectra 3,
an entity controlled by Donald L. Sturm, was formed for the purpose of
participating in this equity investment. Spectra 3 is an affiliate of Spectra
1 and Spectra 2, entities that owned equity securities of FirstWorld prior to
the Equity Investment. See "Principal Stockholders of Certain Beneficial
Owners and Management." Spectra 1,2 and 3 are referred to as the "Sturm
Entities."
The stock purchase agreement also granted Spectra 3 and Enron, for a period
of 45 days following the closing of the equity investment, the right to invest
an additional $20.0 million in the aggregate on the same terms applicable to
their purchases of Series A common stock, except that any additional shares of
common stock to be acquired would be Series B common stock. Spectra 3 and
Enron exercised this option in April 1998 and acquired an aggregate of shares
of Series B common stock at an exercise price of $3.00 per share.
Investor Rights Agreement. In connection with the closing of the equity
investment discussed above, we entered into an amended and restated investor
rights agreement which entitles Spectra 3, Enron and other prior investors to
certain demand and piggyback registration rights. See "Description of Capital
Stock--Registration Rights." In addition, the Sturm Entities and Enron were
granted rights of first refusal that permit them to maintain their respective
percentage ownership interest in FirstWorld with respect to certain future
equity issuances. Under the terms of his employment agreement, Mr. Ohringer
was also granted a right to maintain his percentage ownership interest in
FirstWorld with respect to certain future equity issuances.
In connection with the additional investment of $20.0 million discussed
above, we further amended and restated the investor rights agreement in order
to (i) allow for, and coordinate with, the registration rights granted
pursuant to the warrant registration rights agreement dated April 13, 1998
between FirstWorld and the initial purchasers of those warrants and (ii) to
make certain other revisions to the previous version of the investor rights
agreement. Also, in connection with the hiring of Mr. Ohringer as our
President and Chief Executive Officer in October 1998, we amended the investor
rights agreement to waive the right of first refusal with respect to the
issuance of options pursuant to Mr. Ohringer's employment agreement.
In connection with the 1999 Equity Investment Agreement the Investor Rights
Agreement was amended to: (i) waive the right of first refusal held by the
Eligible Holders related to the acquisition of the Series B common stock that
may occur pursuant to the agreement, (ii) provide Spectra 4 the same rights
and obligations as the "Sturm Entities" under the Investor Rights Agreement,
and (iii) provide the same registration rights to Spectra 4 as are provided to
other holders under the agreement.
Amendment to Sturm Warrant. On January 31, 1997, FirstWorld, Spectra 1 and
Spectra 2 entered into a warrant purchase/right to maintain agreement pursuant
to which we sold to Spectra 2 a warrant that was initially exercisable for
800,000 shares of common stock at an aggregate exercise price of $3.8 million.
This warrant contained an anti-dilution provision pursuant to which the number
of shares that could be purchased could be increased based upon the weighted
average issuance price of equity securities issued by FirstWorld prior toApril
1, 1999. In connection with the closing of the 1997 equity investment, this
warrant was amended to provide for the issuance upon exercise of up to
2,110,140 shares of Series B common stock with an exercise price of $1.80 per
share, amounting to an aggregate exercise price of approximately $3.8 million.
The warrant is subject to customary adjustment on stock splits, stock
dividends, subdivisions or combinations, but is not otherwise subject to
adjustment. In addition, Spectra 1 and Spectra 2 waived their maintenance
rights provided under the warrant purchase/right to maintain agreement.
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Board of Directors. Upon the closing of the December 1997 equity
investment, FirstWorld's board of directors was reconstituted with seven
directors as follows: three designees of the Sturm Entities--Donald L. Sturm,
Melanie Sturm and James O. Spitzenberger; two designees of Enron Capital--C.
Kevin Garland and Rodney Malcolm (Mr. Malcolm resigned in April 1999 and was
replaced by Mr. Horn); one management representative--Robert E. Randall; and
John C. Stiska, an existing director, as an independent member of the board.
Pursuant to the stock purchase agreement, the Series B common stock holders
became entitled to designate a director in lieu of the manager representative.
Waiver of Business Opportunities. To reduce the potential for conflicts of
interest among Enron, the Sturm Entities and FirstWorld and their affiliates,
we revised our certificate of incorporation to provide that FirstWorld
generally may not engage in oil, natural gas, electricity, water and other
energy related business.
In addition to this restriction, FirstWorld, the Sturm Entities and Enron
entered into a business opportunity agreement to address the fact that Enron
and the Sturm Entities or their affiliates own or participate in
telecommunications businesses, and may develop, finance or otherwise
participate in such businesses in the future, including businesses that may
compete with FirstWorld. Enron advised FirstWorld and the Sturm Entities that
(a) FirstPoint Communications, Inc. and its affiliates, which are affiliates
of Enron, are engaged in the business of providing telecommunications
services, and may have developed or will develop, finance or acquire interests
in telecommunications and related companies that compete with FirstWorld, and
(b) FirstPoint was at the time of the investment by Enron in FirstWorld
pursuing a financing, acquisition or investment opportunity in a competitor or
potential competitor of FirstWorld.
This business opportunity agreement generally provides, except as agreed by
the parties and as set forth in that agreement, that (i) neither Enron, the
Sturm Entities nor any of their affiliates would have any obligation to pursue
any business opportunity jointly with FirstWorld or to offer any business
opportunity to FirstWorld, and any Enron or Sturm Entity representative on the
board would have no obligation to offer any business opportunity to
FirstWorld; (ii) Enron, the Sturm Entities and their affiliates would be free
to pursue business opportunities jointly with parties other than FirstWorld,
including opportunities that might involve telecommunications; and (iii)
Enron, the Sturm Entities and their affiliates would be free to compete with
FirstWorld and would have no obligation to refrain from engaging in any
business.
Grant of Exclusive Rights to Enron. The business opportunity agreement also
provides that we would, during an exclusivity period, grant Enron and its
affiliates the exclusive right to pursue jointly with us any "joint
application opportunity" that includes both telecommunications and utility
applications, for example, the marketing of natural gas, electricity or water
and the provision of related services. The exclusivity period began on the
closing of the December 1997 equity investment and continues until the earlier
of (x) December 30, 2000 or (y) the date upon which Enron and any of its
affiliates hold less than 5% of the capital stock or warrants of FirstWorld
(determined on a fully-diluted basis). During this exclusivity period, we are
obligated to provide Enron notice of any joint application opportunity that we
want to pursue anywhere in the United States. If Enron notifies us that it
desires to participate, then we cannot pursue the joint application
opportunity without the participation of Enron. If Enron elects not to
participate, then we are free to pursue independently the telecommunications
portion of the joint application opportunity without the participation of
Enron, but we cannot pursue the joint application opportunity with any other
person (except for provision of the telecommunications portion thereof on a
subcontract basis only), and Enron is free to pursue the joint application
opportunity (including the utility applications and/or the telecommunications
applications) on its own or with any party other than FirstWorld.
Securityholders Agreement. The Sturm Entities and Enron entered into a
securityholders agreement, to which FirstWorld is also a party, in connection
with the closing of the December 1997 equity investment. This contains
agreements among the Sturm Entities and Enron with respect to the designation,
election, removal and replacement of the members of the board other than those
elected by the holders of our Series B common stock. It also contains
agreements among the Sturm Entities and Enron (i) providing for rights of
first offer with respect to certain proposed transfers of common stock or
warrants of FirstWorld by any of the Sturm Entities or Enron,
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(ii) providing for rights to purchase the common stock and warrants held by a
party to the securityholders agreement, other than FirstWorld, that
experiences a change of control or other triggering event and (iii) providing
for rights to participate in certain proposed dispositions of common stock or
warrants by any of the Sturm Entities or Enron. In connection with the 1999
Equity Investment Agreement, the Securityholders Agreement was amended to add
Spectra 4 as a Holder and a member of the Sturm Group as those terms are
defined under that Agreement.
Transaction Fees and Expenses. We paid the Spectra 3 and Enron a
transaction fee equal to six percent of the gross amount invested by them in
the December 1997 equity investment and the additional $20 million in April
1998--$1.5 million for each of Spectra 3 and Enron. In addition, FirstWorld
reimbursed all reasonable costs and expenses of the Sturm Entities and Enron
incurred in connection with the stock purchase agreement, up to a maximum of
$50,000 for the Sturm Entities and $50,000 for Enron, plus the $90,000 of
required filing fees under the Hart-Scott-Rodino Act.
Management Services Agreements. FirstWorld entered into separate management
consulting services agreements with each of Enron and Corporate Managers, LLC,
a Colorado limited liability company which is an affiliate of the Sturm
Entities and of which Mr. Spitzenberger is a member. Pursuant to this
agreement, Enron and Corporate Managers will provide management services to
FirstWorld for three years following the closing of the equity investment in
exchange for an annual management fee. Both management consulting services
agreements initially provided for annual management fees of $500,000 plus out
of pocket expenses. The Company amended the management consulting services
agreement with Corporate Managers in March 1998 to provide for an annual
management fee of $620,000 plus out of pocket expenses because Mr. Sturm had
taken a more active management role with FirstWorld than originally
anticipated. On October 1, 1998, FirstWorld further amended that management
consulting services agreement to reduce the compensation payable to Corporate
Managers thereunder to $500,000 per year. This reduction was intended to
reflect the reduced role Mr. Sturm was expected to take effective with the
retention of Mr. Ohringer as FirstWorld's new Chief Executive Officer and
President. Corporate Managers and Enron each has the right in its discretion
to terminate its management consulting services agreement with FirstWorld.
Optec Capacity Agreement
As part of the Optec acquisition we acquired rights to use 15 OC-3 level
data network capacity increments in cities located on Enron's long haul
network currently under construction. Enron has advised us that capacity is
available in Portland, Los Angeles and Salt Lake City. Enron is obligated to
deliver capacity to Denver, Houston, Dallas and Miami by November 24, 2001. If
capacity is not delivered by this date we may extend the agreement. We may
select capacity increments in additional cities or increase our capacity in
selected cities which in the aggregate does not exceed 15 OC-3 level
increments. Our rights terminate on the earlier of November 24, 2005 or 4
years after the date capacity is made available to the last of the cities
listed above. In addition, we obtained a right to use 48 fiber strands in
three routes in the Portland metropolitan area for the economically useful
life of the fiber.
Network Equipment Sale
In November 1999 we agreed to sell approximately $3.4 million worth of
network equipment to Enron Leasing.
Sturm Equity Investment Agreement
On December 2, 1999, we entered into an agreement with Colorado Spectra 4,
LLC, an affiliate of the Sturm Entities, which provides for a $50.0 million
equity commitment from Spectra 4. The agreement will allow us to require that
the Spectra 4 purchase up to $50.0 million of Series B common stock priced at
$7.50 per share, and will expire on the earlier June 18, 2000 or the closing
of this offering.
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The agreement contains three dates on which we can require that Spectra 4
purchase the Series B common stock. These dates are: February 15, 2000, March
31, 2000 and the expiration date of the agreement. Additionally, if at any
time after the effectiveness of the agreement the amount of cash, cash
equivalents and marketable securities we hold falls below $20.0 million, we
will be deemed to have exercised $25.0 million of the commitment. Under the
terms of the agreement, we are required to pay Spectra 4 a non-refundable $5.0
million fee for the commitment no later than the closing of this offering.
Subsequent Transfer of Certain Interests and Obligations of Enron
The FirstWorld Securities purchased by Enron were subsequently transferred
to Sundance Assets LLP, an affiliate of Enron. Enron continues to be a party
to the business opportunity agreement and the management consulting services
agreement.
Legal Matters
John C. Stiska, one of FirstWorld's directors, accepted an of counsel
position with Latham & Watkins in July 1998. During 1999, Latham & Watkins
provided legal services to FirstWorld.
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DESCRIPTION OF CAPITAL STOCK
Effective on the closing of this offering, FirstWorld's authorized capital
stock will consist of: (i) 150,000,000 shares of common stock and (ii)
10,000,000 shares of preferred stock, $.0001 par value per share. Of the
authorized common stock, 10,135,164 shares have been designated Series A
common stock and 139,864,836 have been designated Series B common stock. As of
November 30, 1999, no shares of preferred stock, 10,135,164 shares of Series A
common stock, 18,642,842 shares of Series B common stock and warrants to
purchase 25,048,527 shares of Series B common stock were issued and
outstanding.
Except as otherwise required by law, actions taken at FirstWorld's
stockholder meetings require the affirmative vote of a majority of the shares
represented at the meeting and that a quorum be present. The holders of common
stock have no preemptive rights. See "Certain Transactions--December 1997
Equity Investment--Investor Rights Agreement." In the event of a liquidation,
dissolution or winding up of FirstWorld, holders of common stock are entitled
to share ratably in the assets of the company which are legally available for
distribution, if any, remaining after the payment of all debts and liabilities
of FirstWorld and the liquidation preference of any then outstanding preferred
stock. At present there is no established market for FirstWorld's common
stock.
Series A Common Stock.
Each share of FirstWorld's Series A common stock entitles the holder to ten
votes on all matters submitted to a vote of stockholders. Each share of Series
A common stock is convertible at any time at the option of the holder into one
share of Series B common stock in accordance with the terms of our certificate
of incorporation. In addition, each share of Series A common stock
automatically converts into one share of Series B common stock,
. upon a sale or transfer of any Series A common stock to anyone other than
(1) a natural person who is qualified as an accredited investor under
applicable securities laws and who is a member, manager or officer of
Spectra 3 or an affiliate of any such member, manager or officer (a
"Permitted Transferee") or (2) an affiliate of Donald L. Sturm or Enron,
or
. with respect to shares of Series A Common Stock held by Spectra 3, upon a
transfer of a controlling interest in Spectra 3 to any person or entity
other than Enron, Donald L. Sturm, a Permitted Transferee or one of their
affiliates.
Spectra 3 and Enron, the two principal holders of Series A common stock,
are parties to the Securityholders Agreement, which, among other things,
contains agreements with respect to the designation, election, removal and
replacement of the members of FirstWorld's board of directors other than the
director elected by the holders of the FirstWorld's Series B common stock. See
"Certain Transactions--December 1997 Equity Investment--Securityholders
Agreement."
Series B Common Stock
Each share of Series B common stock entitles the holder thereof to one vote
on all matters submitted to a vote of stockholders. The holders of Series B
Common Stock voting as a class are entitled to elect one director at each
meeting called for the election of directors. Any vacancy occurring because of
the death, resignation or removal of a director elected by holders of Series B
common stock shall be filled by the vote or written consent of a majority of
the shares of Series B common stock or, in the absence of such action by the
holders of Series B common stock, by the action of the remaining directors
then in office. All other directors shall be elected by the holders of Series
A common stock and Series B common stock voting together.
Preferred Stock
Our board of directors is authorized, without further stockholder approval,
to issue up to an aggregate of 10,000,000 shares of preferred stock in one or
more series. The board of directors may fix or alter the
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designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series, and the dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption price or prices and liquidation preferences. The issuance of
preferred stock could:
. adversely affect the voting power of holders of common stock,
. adversely affect the likelihood that the holders of common stock will
receive dividend payments and payments upon liquidation, and
. delay, defer or prevent a change in control of FirstWorld.
We have no present plans to issue any shares of preferred stock.
Warrants
Private Note Warrants. In April 1998 FirstWorld sold 470,000 units each
consisting of a $1,000 principal amount at maturity of notes and a warrant to
purchase 7.9002 shares of the Company's Series B common stock (subject to
adjustment). These warrants, referred below as "Private Note Warrants," have
an exercise price of $.01 per share, are exercisable at any time on or after
the earlier to occur of an initial public offering of our Series B common
stock or a change of control of FirstWorld, and expire on April 15, 2008.
These warrants have the registration rights set forth below under the caption
"--Registration Rights."
Other Warrants. In August 1997, in connection with a financing transaction,
we issued to Sand Hill Capital, LLC, two seven year warrant currently
exercisable for 470,092 shares of Series B common stock at a price of $3.829
per share. On September 16, 1997, in connection with a financing transaction,
we issued to Foothill Capital Corporation a five year warrant to purchase
800,000 shares of Series B common stock at a price of $3.00 per share. On
January 31, 1997 we issued a warrant to Mr. Sturm currently exercisable for
2,110,140 shares of Series B common stock with an exercise price of $1.80 per
share See "Certain Transactions--December 1997 Equity Investment--Amendment to
Sturm Warrant." In connection with the equity investments of December 1997 and
April 1998 by Spectra 3 and Enron, we issued to those entities warrants to
purchase an aggregate of 16,801,830 shares of Series B common stock at a price
of $3.00. In connection with our Series C preferred stock financing, we issued
warrants currently exercisable for an aggregate of 954,682 shares of Series B
common stock for an average exercise price of $3.83.
Registration Rights
Several agreements provide registration rights to certain of FirstWorld's
investors.
The Investor Rights Agreement. The Amended and Restated Investor Rights
Agreement grants demand and "piggyback" registration rights to the Sturm
Entities, Enron and certain other investors with respect to 22,439,589 shares
of Series B common stock. Subject to certain exceptions and requirements, the
parties to the investor rights agreement are entitled to demand three long-
form registrations; provided, however, that FirstWorld is not required to
effect demand registrations prior to the earlier to occur of January 31, 2000
or FirstWorld's first firm commitment underwritten public offering of its
Series B common stock. In addition, subject to certain exceptions and
requirements, the parties to the investor rights agreement are entitled to
demand unlimited short-form registrations once such short-form registration
becomes available to FirstWorld. The parties to the investor rights agreement
also possess "piggyback" registration rights which entitle them to have their
shares registered on registration statements relating to primary or secondary
registered public offerings of FirstWorld's securities, subject to certain
cutback restrictions in connection with any public offerings of FirstWorld's
equity securities.
Foothill Warrant. The holder of a warrant to purchase 800,000 shares of
Series B common stock issued to a lender of FirstWorld is entitled, subject to
certain limitations, to demand two registrations. FirstWorld is not required
to effect such demand registrations prior to the consummation of this
offering. The holder of this warrant
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also possesses "piggyback" registration rights which entitle it to have its
shares registered on registration statements relating to primary or secondary
registered public offerings of FirstWorld's securities. The holder of this
warrant is subject to certain cutback restrictions in connection with any
public offerings of FirstWorld's equity securities.
Sand Hill Warrant. The holder of two warrants to purchase an aggregate
amount of 470,092 shares of Series B common stock issued to a previous lender
of FirstWorld was granted the same rights to "piggyback" registrations as were
granted to the parties under the Amended and Restated Investor Rights
Agreement.
Private Note Warrants. Beginning the earlier of April 15, 2003 or 180 days
after the consummation of this offering, the holders of 25% or more of the
Private Note Warrants and the shares issued upon exercise of those warrants,
referred to as "Warrant Shares," will be entitled to require FirstWorld to
effect one demand registration of the Warrant Shares. The Private Note
Warrants are currently excersiable for 3,713,094 shares of Series B common
stock. Subject to certain conditions and limitations, upon a demand,
FirstWorld will notify the holders of all Private Note Warrants and Warrant
Shares that a demand registration has been requested, and prepare and file
within 120 days of such demand a registration statement in respect of all of
the Warrant Shares which holders request to have included therein. Holders of
Warrant Shares have priority for inclusion in a demand registration over any
other security holders seeking to include securities in such registration.
Holders of Private Note Warrants and Warrant Shares also have the right,
subject to certain limitations, to include the Warrant Shares in any
registration statement under the Securities Act filed by FirstWorld either for
our own account or for the account or other security holders on the same terms
and conditions whenever such a registration statement is filed under the
Securities Act. In the case of a such a "piggy-back registration," a holder's
right to include shares in a underwritten registration is subject to the
ability of the underwriters to limit the number of shares included in such
offering, except that (i) 800,000 shares of Series B common stock issuable
upon exercise of the Lender Warrant discussed above generally have priority
for inclusion over the Warrant Shares and securities having registration
rights under the Amended and Restated Investor Rights Agreement and (ii) in
the case of a demand registration under the Amended and Restated Investor
Rights Agreement, holders of demand registration rights thereunder have
priority over the Warrant Shares and securities issuable upon exercise of a
the Lender Warrant.
If FirstWorld has complied with all its obligations with respect to a
demand registration or a piggy-back registration relating to an underwritten
public offering, all holders of Warrants and Warrant Shares, upon request of
the lead managing underwriter with respect to such underwritten public
offering, generally will be required to not sell or otherwise dispose of any
warrants or underlying shares for a period not to exceed 180 days from the
consummation of such underwritten public offering.
Anti-Takeover Effects of Certain Provisions of Delaware Law and Our
Certificate of Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, which generally prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained that status with the approval of the corporation's board
of directors or unless the business combination is approved in a prescribed
manner. "Business combinations" include mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
With certain exceptions, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years did own, fifteen
percent (15%) or more of a corporation's voting stock. This statute could
prohibit or delay the accomplishment of mergers or other takeover or change-
in-control attempts and, accordingly, may discourage attempts to acquire us.
The following provisions of our restated certificate of incorporation and
amended and restated bylaws that will become effective upon the closing of
this offering may have an anti-takeover effect and may delay or prevent
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a tender offer or takeover attempt that a stockholder might consider to be in
its best interest, including attempts that might result in a premium over the
market price for the common stock:
Board of Director Vacancies. The board of directors will be authorized to
fill vacant directorships and to increase the size of the board of directors.
This may deter a stockholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling the
resulting vacancies with its own nominees.
Stockholder Action; Special Meetings of Stockholders. Prior to the
consummation of this offering, our stockholders will be permitted to take
action by written consent, but only at duly called annual or special meetings
of stockholders. In addition, special meetings of stockholders may be called
only by the chairman of the board, the chief executive officer or a majority
of the board of directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Stockholders seeking to bring business before an annual meeting
of stockholders, or to nominate candidates for election as directors at an
annual meeting of stockholders, must deliver a written notice to our principal
executive offices within a prescribed time period. Our amended and restated
bylaws also set forth specific requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations
for the election of directors at an annual meeting of stockholders.
Authorized but Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval, subject to limitations imposed by the Nasdaq National
Market. We may use these additional shares for a variety of corporate
purposes, including future public offerings to raise additional capital,
acquisitions and employee benefit plans. The existence of authorized but
unissued and unreserved common stock and preferred stock could render more
difficult or discourage an attempt to obtain control of us by means of a proxy
contest, tender offer, merger or otherwise.
Limitations on Liability and Indemnification Matters
Our amended and restated bylaws that will become effective upon the closing
of this offering provide that we will indemnify our directors and executive
officers to the fullest extent permitted by Delaware law and may indemnify our
other officers, employees and other agents to the fullest extent permitted by
Delaware law.
In addition, our restated certificate of incorporation that will become
effective upon the closing of this offering provides that, to the fullest
extent permitted by Delaware law, our directors will not be personally liable
to us or our stockholders for monetary damages for any breach of fiduciary
duty as directors. This provision of the restated certificate of incorporation
does not eliminate the directors' duty of care. In appropriate circumstances,
equitable remedies such as an injunction or other forms of non-monetary relief
are available under Delaware law. This provision also does not affect the
directors' responsibilities under any other laws, such as the federal
securities laws and state and federal environmental laws.
Each director will continue to be subject to liability for:
. breach of a director's duty of loyalty to us and our stockholders;
. acts or omissions not in good faith, accompanied by circumstances of
gross neglect or that involve intentional misconduct or a knowing
violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
. any transaction from which a director derived an improper personal
benefit.
We have entered into indemnification agreements with our directors and
executive officers and have obtained directors' and officers' liability
insurance.
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There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought. We are not aware of
any pending or threatened litigation that may result in a claim for
indemnification.
Listing
We have applied for listing of the common stock on the Nasdaq National
Market under the trading symbol "FWIS."
Transfer Agent and Registrar
We have appointed Norwest Bank Minnesota, NA to serve as the transfer agent
and registrar for the common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. We cannot predict what effect, if any, market sales of shares or the
availability of shares for sale will have on the market price of our common
stock prevailing from time to time. Nevertheless, sales of substantial amounts
of common stock in the public market, or the perception that such sales could
occur, could adversely affect the market price of the common stock and could
impair our future ability to raise capital through the sale of our equity
securities.
Upon the closing of this offering, we will have a total of
shares of Series A and Series B common stock outstanding, assuming no exercise
of the underwriters' over-allotment option and no exercise of options or
warrants. Of the outstanding shares, the shares being sold in this
offering will be freely tradable, except that any shares held by our
"affiliates" may only be sold in compliance with the limitations described
below. The remaining shares of common stock will be "restricted
securities" that may be sold in the public market only if they are registered
under the Securities Act or if they qualify for an exemption from registration
under Rule 144, 144(k) or 701 promulgated under the Securities Act.
Subject to the lock-up agreements described below and the provisions of
Rules 144, 144(k) and 701, additional shares will become available for sale in
the public market as follows:
<TABLE>
<CAPTION>
Number
of
Shares Date
------ ----
<C> <S>
Upon the date of this prospectus (shares eligible for resale under
Rule 144(k) and not subject to lock-up agreements)
90 days following the date of this prospectus (shares eligible for
resale under Rules 144 and 701 and not subject to lock-up agreements)
180 days following the date of this prospectus (lock-up agreements
released)
</TABLE>
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated), including an affiliate, who has beneficially owned shares
for at least one year is entitled to sell, within any three-month period
commencing 90 days after the date of this prospectus, a number of shares that
does not exceed the greater of (i) 1% of the then-outstanding shares of common
stock (approximately shares immediately after this offering) or
(ii) the average weekly trading volume of the common stock during the four
calendar weeks preceding the date on which notice of that sale is filed. In
addition, a person who is not considered an affiliate of ours at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations described above.
In addition, following the closing of this offering, we intend to file a
registration statement to register for resale the shares of common
stock available for issuance under our stock plans. Accordingly, shares issued
under those plans will become eligible for resale in the public market from
time to time, subject to the lock-up agreements described below and, in the
case of affiliates of FirstWorld, the volume limitations of Rule 144 described
above. As of the date of this prospectus, options and purchase rights to
acquire a total of shares of common stock are outstanding under our
stock plans, of which are currently exercisable.
Directors, officers and stockholders of FirstWorld holding an aggregate of
shares of common stock have agreed that they will not sell any
shares of common stock without the prior written consent Lehman Brothers Inc.
for a period of 180 days from the date of this prospectus. Please refer to our
discussion in "Underwriting" for further discussion of these agreements.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, other
than the grant of options and purchase rights under our stock plans and the
issuance of common stock pursuant thereto.
Following this offering, certain of our stockholders will have rights to
have their shares of common stock registered for resale under the Securities
Act. Please refer to "Description of Capital Stock" for further discussion of
these registration rights.
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CERTAIN UNITED STATES TAX CONSEQUENCES FOR NON-U.S. INVESTORS
Introduction
The following is a summary of certain United States federal income and
estate tax consequences to non-U.S. investors of owning and disposing of
Series B common stock. In this summary, a "non-U.S. investor" is a beneficial
owner of our Series B common stock that is, for United States federal income
tax purposes:
. a nonresident alien individual,
. a foreign corporation,
. a nonresident alien fiduciary of a foreign estate or trust, or
. a foreign partnership.
This summary does not address all of the United States federal income and
estate tax considerations that may be relevant to you in light of your
particular circumstances and also does not discuss any state, local or foreign
tax. This summary is based on current provisions of the Internal Revenue Code
of 1986, as amended. Treasury regulations, and judicial and administrative
interpretations as of the date hereof. These authorities are all subject to
change, possibly with retroactive effect. If you are considering buying Series
B common stock, you should consult your tax advisor with respect to the tax
consequences of owning and disposing of the Series B common stock.
Distributions
Dividends paid to a non-U.S. investor generally will be subject to
withholding of United States federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. To receive a
reduced treaty rate, you must furnish to us or our paying agent a completed
IRS Form 1001 or W-8BEN (or substitute form) certifying that you qualify for a
reduced rate. Dividends that are effectively connected with the conduct of a
trade or business within the United States of a non-U.S. investor or, if a
treaty applies, attributable to a permanent establishment of a non-U.S.
investor within the United States, will be exempt from withholding if you
provide us with an IRS Form 4224 or IRS Form W-8ECI (or substitute form).
Dividends exempt from withholding because they are effectively connected or
attributable to a permanent establishment of a non-U.S. investor will instead
be taxed at ordinary United States federal income tax rates on a net income
basis. Further, if the non-U.S. investor is a corporation, this effectively
connected dividend income may also be subject to an additional branch profits
tax equal to 30% of its effectively connected earnings and profits for the
taxable year, as adjusted for certain items, unless an applicable treaty
provides otherwise. Under current Treasury regulations, dividends paid before
January 1, 2001 to an address outside the United States are presumed to be
paid to a resident of the country of address for purposes of the withholding
discussed above and for purposes of determining the applicability of a tax
treaty rate. However, for dividends paid after December 31, 2000, this
presumption is eliminated, and a non-U.S. investor would be required to
satisfy applicable certification and other requirements.
If a distribution is made that is not a dividend, it will first constitute
a return of capital that is applied against the non-U.S. investor's basis in
the Series B common stock and any remaining amount will be treated as gain
from the sale or exchange of stock. Currently, withholding of United States
federal income tax is generally imposed on the gross amount of a distribution,
regardless of whether we have sufficient current and accumulated earnings and
profits to cause the distribution to be a dividend for United States federal
income tax purposes. However, withholding on distributions made after December
31, 2000 may be on less than the gross amount of the distribution if the
distribution exceeds a reasonable estimate by us of our accumulated and
current earnings and profits.
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Sale or Other Disposition of Series B Common Stock
A non-U.S. investor generally will not be subject to United States federal
income tax on any gain recognized on the sale or other disposition of Series B
common stock, except in the following circumstances:
(1) The gain is effectively connected with a trade or business of the
non-U.S. investor within the United States or, if a treaty applies, is
attributable to a permanent establishment of the non-U.S. investor. Unless
an applicable treaty provides otherwise, the non-U.S. investor will be
taxed on its net gains derived from the sale under regular graduated U.S.
federal income tax rates. If the non-U.S. investor is a foreign
corporation, it may be subject to an additional branch profits tax equal to
30% of its effectively connected earnings and profits for the taxable year,
as adjusted for certain items, unless an applicable treaty provides
otherwise.
(2) The non-U.S. investor is an individual who holds the Series B common
stock as a capital asset, is present in the United States for 183 or more
days in the taxable year of the sale or other disposition, and certain
other conditions are met. In this case, the non-U.S. investor will be
subject to a flat 30% tax on the gain derived form the sale, which may be
offset by certain United States capital losses.
(3) United States federal income tax laws applicable to certain
expatriates applies to the non-U.S. investor.
(4) We are or have been a "United States real property holding
corporation" at any time during the five-year period ending on the date of
disposition (or, if shorter, the non-U.S. investor's holding period),
unless both (i) the non-U.S. investor held, actually or constructively, no
more than 5 percent of the outstanding Series B common stock and (ii) our
stock is "regularly traded on an established securities market," for
purposes of these rules. We believe that we will not constitute a United
States real property holding corporation immediately after the offering and
do not expect to become a United States real property holding corporation;
however, we can give no assurance in this regard.
Backup Withholding and Information Reporting
Dividends. United States backup withholding tax generally will not apply to
dividends paid before January 1, 2001, to a non-U.S. investor at an address
outside the United States, or to dividends paid after December 31, 2000 if the
non-U.S. investor certifies that it is a non-U.S. investor on an IRS Form W-
8BEN or otherwise establishes an exemption. We must report annually to the IRS
and to each non-U.S. investor the amount of dividends paid to such investor
and the amount, if any, of tax withheld with respect to such dividends. This
information may also be made available to the tax authorities in the non-U.S.
investor's country of residence.
Sale through a U.S. office of a broker. Upon the sale or other disposition
of Series B common stock by a non-U.S. investor to or through a United States
office of a broker, the broker must backup withhold at a rate of 31% and
report the sale to the IRS, unless the investor certifies its foreign status
under penalties of perjury or otherwise establishes an exemption from backup
withholding.
Sale through a foreign office of a broker. The proceeds of a sale or other
disposition of Series B common stock by a non-U.S. investor to or through a
foreign office of a United States or foreign broker will not be subject to
backup withholding. However, if the broker is a U.S. person or a foreign
person with certain types of relationships with the United States, it must
report the sale or other disposition to the IRS unless the broker has
documentary evidence in its files that the seller is a non-U.S. investor and
certain other conditions are met, or the holder otherwise establishes an
exemption.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit against
the non-U.S. investor's United States federal income tax liability, if any,
provided, that the required information is timely furnished to the IRS.
91
<PAGE>
Federal Estate Taxes
Series B common stock owned or treated as owned by an individual who is not
a citizen or resident, as defined for United States federal estate tax
purposes, at the time of death, will be included in such individual's gross
estate for United States federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.
The foregoing discussion is a summary of certain United States federal
income and estate tax consequences of the ownership, sale or other disposition
of our Series B common stock by non-U.S. investors. You are urged to consult
you own tax advisor with respect to the particular tax consequences to you of
ownership and disposition of our Series B common stock, including the effect of
any state, local, foreign or other tax laws.
92
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the U.S.
underwriters named below, for which Lehman Brothers Inc., Bear Stearns & Co.
Inc., Deutsche Bank Securities Inc. and PaineWebber Incorporated are acting as
U.S. representatives, and each of the international managers named below, for
which Lehman Brothers International (Europe), Bear Stearns International
Limited, Deutsche Bank AG London and PaineWebber International (UK) Ltd. are
acting as lead managers, have agreed to purchase from us, severally, the
number of shares of Series B common stock shown opposite its name below:
<TABLE>
<CAPTION>
Number of
U.S. Underwriters Shares
----------------- ---------
<S> <C>
Lehman Brothers Inc................................................
Bear Stearns & Co. Inc.............................................
Deutsche Bank Securites Inc. ......................................
PaineWebber Incorporated...........................................
-------
Subtotal.........................................................
-------
<CAPTION>
Number of
International Managers Shares
---------------------- ---------
<S> <C>
Lehman Brothers International (Europe).............................
Bear Stearns International Limited.................................
Deutsche Bank AG London............................................
PaineWebber International (UK) Ltd. ...............................
-------
Subtotal.........................................................
-------
Total............................................................
=======
</TABLE>
We refer to the U.S. underwriters and international managers as the
underwriters and the U.S. representatives and international lead managers as
the representatives.
The underwriting agreement provides that the obligations of the
underwriters to purchase shares of common stock depend on the satisfaction of
the conditions contained in the underwriting agreement. The underwriting
agreement also provides that if any of the shares of Series B common stock are
purchased by the underwriters, then all of the shares of Series B common stock
which the underwriters have agreed to purchase under the underwriting
agreement must be purchased. The conditions contained in the underwriting
agreement include the requirement that:
. the representations and warranties made by us to the underwriters are
true;
. there is no material change in the financial markets; and
. we deliver to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of Series B common stock directly to the public at the public
offering price shown on the cover page of this prospectus, and to dealers, who
may include the underwriters, at the public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and the
dealers may reallow, a concession not in excess of $ per share to brokers
and dealers. After the offering, the underwriters may change the offering
price and other selling terms.
We have granted the U.S. underwriters an option to purchase up to an
aggregate of additional shares of Series B common stock, exercisable
solely to cover over-allotments, if any, at the public offering price less the
underwriting discount shown on the cover page of this prospectus. The U.S.
underwriters may exercise this option at any time until 30 days after the date
of the underwriting agreement. If the option is exercised, each
93
<PAGE>
U.S. underwriter will be committed, so long as the conditions of the
underwriting agreement are satisfied, to purchase a number of additional
shares of Series B common stock proportionate to the U.S. underwriter's
initial commitment as indicated in the table above, and we will be obligated,
under the over-allotment option, to sell the shares of Series B common stock
to the U.S. underwriters.
Each of FirstWorld and the directors, executive officers and certain other
stockholders of FirstWorld has agreed that, without the prior written consent
of Lehman Brothers Inc. on behalf of the underwriters, it will not, during the
period ending 180 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of Series B common stock or any
securities convertible into or exercisable or exchangeable for Series B
common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
Series B common stock,
whether any transaction described above is to be settled by delivery of Series
B common stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
. the sale of shares to the underwriters;
. the issuance by FirstWorld of shares of Series B common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters have
been advised in writing; or
. transactions by any person other than FirstWorld relating to shares of
Series B common stock or other securities acquired in open market
transactions after the completion of the offering of the shares.
The U.S. underwriters and the international managers have entered into an
agreement among U.S. underwriters and international managers. In this
agreement, each U.S. underwriter has agreed that,
. it is not purchasing any of these shares for the account of anyone other
than a U.S. Person, and
. it has not offered or sold, will not offer, sell, resell or deliver,
directly or indirectly, any of these shares or distribute any prospectus
to anyone other than a U.S. Person.
In addition, under the agreement, each international manager has agreed
that,
. it is not purchasing any of these shares for the account of a U.S.
Person, and
. it has not offered or sold, and will not offer, sell, resell, or deliver,
directly or indirectly, any of these shares or distribute any prospectus
to any U.S. Person.
The limitations described above do not apply to stabilization transactions
or to certain other transactions specified in the underwriting agreement and
the agreement among U.S. underwriters and international managers, including
. certain purchases and sales between U.S. underwriters and the
international managers,
. certain offers, sales, resales, deliveries or distributions to or through
investment advisors or other persons exercising investment discretion,
. purchases, offers or sales by a U.S. underwriter who is also acting as an
international manager or by an international manager who is also acting
as a U.S. underwriter and
. other transactions specifically approved by the representatives.
94
<PAGE>
As used in this section, the term "U.S. Person" means any resident or
national of the United States or Canada, any corporation, partnership or other
entity created or organized in or under the laws of the United States or
Canada, or any estate or trust the income of which is subject to United States
or Canadian federal income taxation regardless of the source. The term "United
States" means the United States of America, including the District of
Columbia, and its territories, its possessions and other areas subject to its
jurisdiction, and the term "Canada" means Canada, its provinces, its
territories, its possessions and other areas subject to its jurisdiction.
According to the agreement among the U.S. underwriters and international
managers, sales may be made between the U.S. underwriters and the
international managers of the number of shares of Series B common stock as may
be mutually agreed. The price of any shares so sold shall be the public
offering price as then in effect for the shares of Series B common stock being
sold by the U.S. underwriters and the international managers less an amount
equal to the selling concession allocable to those shares of Series B common
stock, unless otherwise determined by mutual agreement. To the extent that
there are sales between the U.S. underwriters and the international managers
under the agreement among the U.S. underwriters and the international
managers, the number of shares of Series B common stock available for sale by
the U.S. underwriters or by the international managers may be more or less
than the amount specified in the table above.
Before this offering, there has been no public market for shares of our
Series B common stock. The initial public offering price will be negotiated
between the representatives and us. In determining the initial public offering
price of the Series B common stock, the representatives will consider, among
other things and in addition to prevailing market conditions:
. our capital structure;
. estimates of our business potential and earning prospects;
. an overall assessment of our management; and
. the consideration of the above factors in relation to market valuations
of companies in related businesses.
We have applied for quotation of our common stock on the Nasdaq National
Market under the trading symbol "FWIS."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement. We
have also agreed to contribute to payments that the underwriters may be
required to make for these liabilities.
Until the distribution of the Series B common stock is complete, rules of
the Securities and Exchange Commission may limit the ability of the
underwriters and selling group members to bid for and purchase shares of
Series B common stock. As an exception to these rules, the representatives are
permitted to engage in transactions that stabilize the price of the Series B
common stock. These transactions may consist of bids or purchases for the
purposes of pegging, fixing or maintaining the price of the Series B common
stock.
The underwriters may create a short position in the Series B common stock
in connection with the offering. This means that they may sell more shares
than are shown on the cover page of this prospectus. If the underwriters
create a short position, then the representatives may reduce that short
position by purchasing Series B common stock in the open market. The
representatives also may elect to reduce any short position by exercising all
or part of the over-allotment option. The underwriters have informed us that
they do not intend to confirm sales to discretionary accounts that exceed 5%
of the total number of shares of Series B common stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that, if the representatives purchase shares
of Series B common stock in the open market to reduce the underwriters'
95
<PAGE>
short position or to stabilize the price of the Series B common stock, they
may reclaim the amount of the selling concession from the underwriters and
selling group members that sold those shares as part of the offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Series B common
stock. In addition, neither we nor any of the underwriters makes any
representation that the representatives will engage in these transactions or
that these transactions, once commenced, will not be discontinued without
notice.
Each international manager has represented and agreed that:
. it has not offered or sold and, prior to the date six months after the
date of issue of the shares of common stock, will not offer to sell any
shares of common stock to persons in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995;
. it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 and the Regulation with respect to anything
done by it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom; and
. it has only issued or passed on, and will only issue or pass on, to any
person in the United Kingdom any document received by it in connection
with the issue of the shares of common stock if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom these
documents may otherwise be issued or passed upon.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of Series B common stock offered in this
prospectus may be required to pay stamp taxes and other charges under the laws
and practices of the country of purchase, in addition to the public offering
price shown on the cover page of this prospectus.
At our request, the underwriters have reserved up to shares of the
Series B common stock offered by this prospectus for sale to our officers,
directors, employees and their family members and to our business associates.
These shares will be offered at the public offering price shown on the cover
page of this prospectus. These persons must commit to purchase no later than
the close of business on the day following the date of this prospectus. The
number of shares available for sale to the general public will be reduced to
the extent these persons purchase the reserved shares.
96
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for FirstWorld by Cooley Godward LLP, Boulder, Colorado, and for the
underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements as of September 30, 1997 and 1998 and
for each of the three years in the period ended September 30, 1998 and the
consolidated financial statements as of December 31, 1998 and for the three
months then ended and as of September 30, 1999 and for the nine months then
ended, included in this prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the information requirements of the Securities Act, and,
in accordance therewith, we file reports and other information with the SEC.
Such reports and other information can be inspected and copied at the public
reference facilities maintained by the SEC at: Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington D.C. 20549; Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material
also can be obtained from the Public Reference Section of the SEC, at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Please call the SEC at 1-800-SEC-0330 for further information about the
public reference room. The SEC also maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of this site is
http://www.sec.gov. We have applied to have our common stock approved for
quotation on the Nasdaq National Market, and such reports, proxy and
information statements and other information also can be inspected at the
office of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock sold in this offering. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits to the registration statement. For
further information with respect to our company and the common stock to be
sold in this offering, reference is made to the registration statement and the
exhibits and schedules filed as a part of the registration statement.
Statements contained in this prospectus concerning the contents of any
contract or any other document to which this prospectus refers are not
necessarily complete. Each such statement is qualified in all respects by any
underlying contract or document filed as an exhibit to the registration
statement. The registration statement, including its exhibits and schedules,
may be inspected without charge at the SEC's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from such office
after payment of fees prescribed by the SEC.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm.
97
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Audited Annual Financial Statements:
Report of Independent Accountants............................... F-3
Consolidated Balance Sheets at September 30, 1997 and 1998...... F-4
Consolidated Statements of Operations for each of the three
years in the period ended September 30, 1998................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for
each of the three years in the period ended September 30,
1998........................................................... F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended September 30, 1998................... F-8
Notes to Consolidated Financial Statements...................... F-9
Audited Interim Financial Statements:
Report of Independent Accountants............................... F-29
Consolidated Balance Sheets at December 31, 1998 and September
30, 1999 ...................................................... F-30
Consolidated Statements of Operations for the three months ended
December 31, 1998 and the nine months ended September 30, 1999
............................................................... F-31
Consolidated Statements of Stockholders' Equity (Deficit) for
the three months ended December 31, 1998 and the nine months
ended September 30, 1999....................................... F-32
Consolidated Statements of Cash Flows for the three months ended
December 31, 1998 and the nine months ended September 30, 1999
............................................................... F-33
Notes to Consolidated Financial Statements...................... F-34
Unaudited Interim Financial Statements:
Consolidated Balance Sheets (Unaudited) at December 31, 1997 and
September 30, 1998............................................. F-57
Consolidated Statements of Operations (Unaudited) for the three
months ended December 31, 1997 and the nine months ended
September 30, 1998............................................. F-58
Consolidated Statements of Stockholders' Equity (Deficit)
(Unaudited) for the three months ended December 31, 1997 and
the nine months ended September 30, 1998....................... F-59
Consolidated Statements of Cash Flows (Unaudited) for the three
months ended December 31, 1997 and the nine months ended
September 30, 1998............................................. F-61
Notes to Consolidated Financial Statements...................... F-62
</TABLE>
F-1
<PAGE>
[This Page Intentionally Left Blank]
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FirstWorld Communications, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of FirstWorld Communications, Inc. and its subsidiaries at September
30, 1997 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended September 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
San Diego, California
December 14, 1999
F-3
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30,
------------------
1997 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 536 $ 72,039
Restricted cash........................................... 50 --
Marketable securities..................................... -- 165,591
Interest receivable....................................... -- 3,017
Accounts receivable, net of allowance for doubtful
accounts of
$0 and $9,765............................................ 73 493
Prepaid expenses.......................................... 100 306
Other current assets...................................... 15 11
-------- --------
Total current assets..................................... 774 241,457
Property and equipment, net................................ 20,331 44,020
Deferred financing costs, net of accumulated amortization
of $60,872 and $429,818................................... 4,068 8,217
Other assets............................................... 148 411
-------- --------
$ 25,321 $294,105
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................................... $ 2,485 $ 6,611
Accrued interest.......................................... 570 546
Accrued employee costs.................................... 205 222
Other accrued expenses.................................... 113 694
Short-term borrowings, net of discount.................... 401 --
Current portion of long-term debt......................... 8 30
Current portion of capital lease obligations.............. 311 788
-------- --------
Total current liabilities................................ 4,093 8,891
Long-term debt, net of discount............................ 11,756 249,726
Convertible bridge notes................................... 406 --
Capital lease obligations.................................. 6,802 6,115
-------- --------
Total liabilities........................................ 23,057 264,732
Commitments (Notes 7, 8 and 14)............................
Stockholders' equity:
Preferred stock, no par value, 5,160,335 shares authorized
at September 30, 1997:
Series C, convertible, voting, 2,600,000 shares issued and
outstanding.............................................. 12,279 --
Series B, convertible, voting, 2,016,638 shares issued and
outstanding.............................................. 3,670 --
Series A, convertible, non-voting, 118,667 shares issued
and outstanding.......................................... 395 --
Preferred stock, $.0001 par value, 10,000,000 shares
authorized at September 30, 1998; no shares designated,
issued or outstanding.................................... -- --
Common stock, voting, no par value, 15,000,000 shares
authorized at September 30, 1997; 3,262,900 shares issued
and outstanding.......................................... (227) --
Common stock, voting, $.0001 par value, 100,000,000 shares
authorized at September 30, 1998:
Series A, 10,135,164 shares designated; 10,135,164 shares
issued and outstanding................................... -- 1
Series B, 89,864,836 shares designated; 15,929,708 shares
issued and outstanding................................... -- 2
Additional paid-in capital................................. -- 45,617
Warrants................................................... 1,001 31,963
Stockholder receivables.................................... (97) (97)
Accumulated deficit........................................ (14,757) (48,113)
-------- --------
Total stockholders' equity............................... 2,264 29,373
-------- --------
$ 25,321 $294,105
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Service revenue........................ $ 279 $ 75 $ 1,078
Other revenue.......................... 75 96 13
----------- ----------- -----------
354 171 1,091
----------- ----------- -----------
Costs and expenses:
Network and service costs............ 247 474 1,029
Selling, general and administrative
expenses............................ 3,870 7,421 16,113
Depreciation and amortization........ 75 501 2,425
----------- ----------- -----------
4,192 8,396 19,567
----------- ----------- -----------
Loss from operations................... (3,838) (8,225) (18,476)
Other income (expense):
Interest expense..................... (27) (1,372) (16,898)
Interest income...................... 9 149 6,749
----------- ----------- -----------
Loss before extraordinary item......... (3,856) (9,448) (28,625)
Extraordinary item--extinguishment of
debt (Notes 4 and 5).................. -- (105) (4,731)
----------- ----------- -----------
Net loss............................... $ (3,856) $ (9,553) $ (33,356)
=========== =========== ===========
Basic and diluted loss per common
share:
Loss before extraordinary item....... $ (1.38) $ (2.95) $ (1.56)
Extraordinary item--extinguishment of
debt................................ -- (0.03) (0.25)
----------- ----------- -----------
Net loss per common share............ $ (1.38) $ (2.98) $ (1.81)
=========== =========== ===========
Weighted average shares outstanding--
basic and diluted..................... 2,792,250 3,209,450 18,395,172
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Series A Series B
Common Stock Common Stock Additional
------------------- ------------------- Paid-in
Shares Amount Shares Amount Capital
---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at October 1,
1995.................... -- $ -- -- $ -- $ --
Issuance of Series B
preferred stock......... -- -- -- -- --
Issuance of Series B
preferred stock for
settlement of notes
payable and for
consulting services..... -- -- -- -- --
Repurchase of Series A
preferred stock......... -- -- -- -- --
Issuance of Series B
preferred stock for
property and equipment.. -- -- -- -- --
Issuance of common stock
for notes receivable.... -- -- -- -- --
Exercise of options to
purchase common stock
for shareholder notes
receivable.............. -- -- -- -- --
Net loss for 1996........ -- -- -- -- --
---------- -------- ---------- -------- -------
Balance at September 30,
1996.................... -- -- -- -- --
Cancellation of
shareholder notes
receivable for common
stock repurchase........ -- -- -- -- --
Repayment of shareholder
notes receivable........ -- -- -- -- --
Issuance of Series C
preferred stock with
warrants to purchase
520,000 shares of common
stock, net of issuance
costs of $704,638....... -- -- -- -- --
Issuance of common stock
warrants as finders
fees.................... -- -- -- -- --
Issuance of common stock
warrant for cash........ -- -- -- -- --
Exercise of options and
warrants to purchase
common stock............ -- -- -- -- --
Issuance of common stock
warrants with debt...... -- -- -- -- --
Net loss for 1997........ -- -- -- -- --
---------- -------- ---------- -------- -------
Balance at September 30,
1997.................... -- -- -- -- --
Exercise of options to
purchase common stock--
October 1997 to December
1997.................... -- -- -- -- --
Issuance of Series A
common stock with
warrants to purchase
10,135,164 shares of
Series B common stock,
net of offering costs of
$3.9 million............ 10,135,164 16,914 -- -- --
Conversion of Series C
preferred stock, Series
B preferred stock,
Series A preferred stock
and common stock to
Series B common stock as
follows:
Series C preferred
stock; conversion ratio
of 1.39:1, including
anti-dilutive
adjustments............ -- -- 3,621,120 12,279 --
Series B preferred stock
and common stock;
conversion ratio of
1:1.................... -- -- 5,545,638 3,486 --
Series A preferred
stock; conversion ratio
of 1:10................ -- -- 11,867 395 --
Issuance of Series B
common stock with
warrants to purchase
6,666,666 shares of
Series B common stock,
net of offering costs of
$1.8 million............ -- -- 6,666,666 12,467 --
Issuance of warrants to
purchase 3,713,094
shares of Series B
common stock in
connection with the
issuance of 13% Senior
Discount Notes.......... -- -- -- -- --
Exercise of options to
purchase Series B common
stock................... -- -- 67,917 56 --
Establishment of $.0001
par value for Series A
and B common stock in
connection with Delaware
reincorporation......... -- (16,913) -- (28,681) 45,594
Exercise of options to
purchase Series B common
stock--post Delaware
reincorporation......... 16,500 -- 23
Net loss for 1998........ -- -- -- -- --
---------- -------- ---------- -------- -------
Balance at September 30,
1998.................... 10,135,164 $ 1 15,929,708 $ 2 $45,617
========== ======== ========== ======== =======
</TABLE>
See accompanying notes to
F-6
<PAGE>
<TABLE>
<CAPTION>
Series C Series B Series A
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
---------------------- ------------------- ---------------- ------------------- Shareholder Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Warrants Receivables Deficit
----------- -------- ---------- ------- -------- ------ ----------- ------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $ -- 837,667 $ 1,257 127,601 $ 425 2,520,000 $(402) $ -- $ -- $ (1,348)
-- -- 1,142,304 2,355 -- -- -- -- -- -- --
-- -- 33,334 50 -- -- -- -- -- -- --
-- -- -- -- (8,934) (30) -- -- -- -- --
-- -- 3,333 8 -- -- -- -- -- -- --
-- -- -- -- -- -- 396,000 99 -- (99) --
-- -- -- -- -- -- 330,000 74 -- (74) --
-- -- -- -- -- -- -- -- -- -- (3,856)
----------- -------- ---------- ------- -------- ----- ----------- ----- ------- ----- --------
-- -- 2,016,638 3,670 118,667 395 3,246,000 (229) -- (173) (5,204)
-- -- -- -- -- -- (90,000) (23) -- 23 --
-- -- -- -- -- -- -- -- -- 53 --
2,600,000 12,279 -- -- -- -- -- -- 16 -- --
-- -- -- -- -- -- -- -- 37 -- --
-- -- -- -- -- -- -- -- 200 -- --
-- -- -- -- -- -- 106,900 25 -- -- --
-- -- -- -- -- -- -- -- 748 -- --
-- -- -- -- -- -- -- -- -- -- (9,553)
----------- -------- ---------- ------- -------- ----- ----------- ----- ------- ----- --------
2,600,000 12,279 2,016,638 3,670 118,667 395 3,262,900 (227) 1,001 (97) (14,757)
-- -- -- -- -- -- 266,100 43 -- -- --
-- -- -- -- -- -- -- -- 9,628 -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Series C
Convertible Total
Preferred SStockholders'tock
- ------------------Equity-----
Shares (Deficit)
- ------------- -------------
<S> <C>
-- $ (68)
-- 2,355
-- 50
-- (30)
-- 8
-- --
-- --
-- (3,856)
- ------------- -------------
-- (1,541)
-- --
-- 53
2,600,000 12,295
-- 37
-- 200
-- 25
-- 748
-- (9,553)
- ------------- -------------
2,600,000 2,264
-- 43
-- 26,542
(2,600,000) (12,279) -- -- -- -- -- -- -- -- --
-- -- (2,016,638) (3,670) -- -- (3,529,000) 184 -- -- --
-- -- -- -- (118,667) (395) -- -- -- -- --
-- -- -- -- -- -- -- -- 6,333 -- --
-- -- -- -- -- -- -- -- 15,001 -- --
-- -- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- (33,356)
----------- -------- ---------- ------- -------- ----- ----------- ----- ------- ----- --------
-- $ -- -- $ -- -- $ -- -- $ -- $31,963 $ (97) $(48,113)
=========== ======== ========== ======= ======== ===== =========== ===== ======= ===== ========
(2,600,000) --
-- --
-- --
-- 18,800
-- 15,001
-- 56
-- --
-- 23
-- (33,356)
- ------------- -------------
-- $ 29,373
============= =============
</TABLE>
consolidated financial statements
F-7
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1996 1997 1998
------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(3,856) $ (9,553) $ (33,356)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 75 501 2,425
Amortization of deferred financing costs....... -- 61 1,203
Amortization of debt discount.................. -- 58 14,571
Non-cash interest expense...................... -- 38 293
Extraordinary loss on extinguishment of debt... -- 105 3,731
Changes in assets and liabilities:
Restricted cash related to operating
activities................................... -- (50) 50
Accounts receivable, net...................... (102) 30 (420)
Interest receivable........................... -- -- (3,017)
Other assets.................................. (116) (98) (313)
Accounts payable and accrued expenses......... 1,831 1,462 4,700
------- -------- ---------
Net cash used in operating activities........ (2,168) (7,446) (10,133)
------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment............. (908) (12,637) (26,068)
Purchases of held-to-maturity marketable
securities..................................... -- -- (236,701)
Maturities of held-to-maturity marketable
securities..................................... -- -- 71,110
Procurement of patents.......................... (15) (10) --
------- -------- ---------
Net cash used in investing activities........ (923) (12,647) (191,659)
------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of Senior Discount Notes
and related warrants........................... -- -- 250,205
Proceeds from issuance of Series A common stock
and related warrants, net of offering costs.... -- -- 26,136
Proceeds from issuance of Series B common stock
and related warrants, net of offering costs.... -- -- 18,800
Proceeds from stock option and warrant
exercises...................................... -- 25 122
Proceeds from issuance of Series B preferred
stock.......................................... 2,355 -- --
Proceeds from issuance of Series C preferred
stock and related common stock warrants, net of
offering costs................................. -- 4,529 --
Proceeds from issuance of commons stock
warrants....................................... -- 200 --
Proceeds from collection of stockholder
receivables.................................... -- 53 --
Principal payments on capital leases............ (34) (114) (255)
Proceeds from issuance of convertible bridge
notes.......................................... 835 7,347 --
Proceeds from draws under revolving credit
facility and related warrants.................. -- 12,172 3,796
Proceeds from short-term borrowings and related
warrants....................................... -- 1,000 --
Principal payments on short-term borrowings..... -- (500) (550)
Proceeds from other long-term debt.............. 27 -- --
Principal payments on other long-term debt...... (27) (27) (12)
Principal payments on revolving credit
facility....................................... -- (16,300)
Payment of deferred financing costs............. -- (4,128) (8,647)
------- -------- ---------
Net cash provided by financing activities.... 3,156 20,557 273,295
------- -------- ---------
Net increase in cash and cash equivalents........ 65 464 71,503
Cash and cash equivalents at beginning of
period.......................................... 7 72 536
------- -------- ---------
Cash and cash equivalents at end of period....... $ 72 $ 536 $ 72,039
======= ======== =========
Supplemental cash flows information:
Cash paid during the period for interest........ $ 14 $ 440 $ 1,293
Non-cash transactions:
Property and equipment purchased under
capitalized leases............................. 106 7,097 45
Issuance of Series B preferred stock for
settlement of note payable, for consulting
services received, and for procurement of
property and equipment......................... 58 -- --
Issuance of common stock for stockholder
receivables.................................... 173 -- --
Issuance of note payable to repurchase Series A
preferred stock................................ 30 -- --
Conversion of convertible bridge notes into
Series C preferred stock and related warrants.. -- 7,777 --
Conversion of convertible bridge notes into
Series A common stock and related warrants..... -- -- 405
Issuance of common stock warrants as finders
fees........................................... -- 10 --
Non-cash deferred financing costs............... -- 27 --
Issuance of note payable to vendor for up-front
service fees................................... -- -- 150
Issuance of note payable for consulting services
received....................................... -- 50 --
Cancellation of stockholder receivable for stock
repurchase..................................... -- 23 --
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
FirstWorld Communications, Inc. (the Company) commenced operations in
July 1992. On September 1, 1993 the Company changed its name to SpectraNet
International and on January 29, 1998, changed its name to FirstWorld
Communications, Inc. Effective June 26, 1998, the Company changed its state of
incorporation from California to Delaware (Note 9).
The Company is a facilities-based integrated communications provider. The
Company has a data-centric focus, with service offerings bundled to address
the data and voice communications needs of emerging businesses. The Company's
service offerings include data connectivity, high speed Internet access, local
and wide area network (LAN/WAN) connectivity, web hosting, video
communications and system integration services, as well as switch-based local
and long distance telephone services.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of FirstWorld
Communications, Inc. and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the financial statement
date, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents. The Company invests primarily in high-grade short-term
investments which consist of money market instruments and commercial paper.
Marketable Securities
Marketable securities consist principally of commercial paper with
original maturities of beyond three months but less than six months. The
Company has classified its marketable securities as held to maturity as
management has the intent and ability to hold those securities to maturity.
Such securities are recorded at cost, which approximates fair value.
Restricted Cash
Restricted cash in support of outstanding letters of credit totaled
$50,000 at September 30, 1997. No restricted cash exists at September 30,
1998.
Revenue Recognition
The Company recognizes service revenue on local competitive access
services in the month such services are provided. Billings to customers for
services in advance of providing such services are deferred and
F-9
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognized as revenue when earned. Other revenues consist primarily of
royalties earned under a certain patent licensing agreement and are recorded
when earned and when payment is reasonably assured.
During fiscal 1998, approximately 25% of the Company's service revenue
was derived from a single telecommunications customer. During fiscal 1997,
approximately 73% of the Company's service revenue was derived under non-
recurring service contracts with two governmental entities.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist principally of cash equivalents, marketable securities and
accounts receivable. The Company places its short-term cash investments with
high credit-quality financial institutions while commercial paper investments
are placed with high credit-caliber corporate issuers. The Company limits the
amount of credit exposure in any one institution or type of investment
instrument. Credit risk with respect to accounts receivable is minimized
because of the diversification of the Company's commercial telecommunications
customer base. Credit is extended to commercial customers based on an
evaluation of the customer's financial condition and generally collateral is
not required. The Company maintains reserves for potential credit losses from
such customers.
As of September 30, 1997 and 1998, approximately 70% and 25% of accounts
receivable, respectively, was due from a single customer.
Property and Equipment
Property and equipment is recorded at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets. Costs
capitalized in connection with the development of communication networks
include expenses associated with network engineering, design and construction.
Depreciation of communications networks and related infrastructure commences
when the applicable network becomes commercially operational.
The estimated useful lives of the Company's principal classes of assets
are as follows:
<TABLE>
<S> <C>
Network infrastructure...... 20 years
Telecommunications.......... 5-7 years
Building and improvements... 30 years
Furniture, office equipment
and other.................. 3-7 years
Leasehold improvements...... Shorter of estimated useful life or lease term
</TABLE>
Capitalization of Interest
Interest costs incurred during the period of time that internally
constructed assets are being made ready for their intended use are capitalized
as part of acquiring such assets to the extent that these interest costs
relate to financing obtained in order to prepare such assets for use. During
fiscal 1997 and 1998, the Company capitalized approximately $52,000 and
$450,000, respectively, in interest costs associated with the development of
the Company's telecommunications networks.
Deferred Financing Costs
Deferred financing costs include commitment fees and other costs related
to certain debt financing transactions and are being amortized over the term
of the related debt using the interest method.
F-10
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Debt Discount
Discounts recorded in connection with the issuance of debt financing are
deferred and amortized over the term of the related debt using the interest
method.
Fair Value of Financial Instruments
With the exception of the Company's Senior Discount Notes, management
believes that the carrying amounts shown for the Company's financial
instruments reasonably approximate their fair values. The fair value of the
Company's Senior Discount Notes, determined based on quoted high-yield market
bid prices, approximates $141.0 million at September 30, 1998. The carrying
amount of such Senior Discount Notes at September 30, 1998 is $249.6 million.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery
of the asset's carrying value unlikely. Potential impairment associated with
network infrastructure costs is measured on the basis of specific network
projects. An impairment loss would be recognized when the sum of the expected
future net cash flows is less than the carrying amount of the asset. No such
impairment losses have been identified by the Company during the fiscal years
presented.
Stock-Based Compensation Accounting
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss as if the minimum value method had been applied in
measuring compensation expense. Compensation charges for non-employee stock-
based compensation is measured using fair value-based methods.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset or liability is computed
for both the expected future impact of differences between the financial
statement and tax bases of assets and liabilities and for the expected future
tax benefit to be derived from tax loss and tax credit carryforwards.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be "more likely than not" realized in future
tax returns. Tax rate changes are reflected in the statement of operations in
the period such changes are enacted.
Earnings Per Share
The Company calculates net loss per share in accordance with SFAS No.
128, "Earnings Per Share." In accordance with SFAS No. 128, basic earnings per
share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is determined in the
same manner as
F-11
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
basic earnings per share except that the number of shares is increased
assuming exercise of dilutive stock options, purchase rights and warrants
using the treasury stock method and conversion of the Company's convertible
preferred stock using the if-converted method.
<TABLE>
<CAPTION>
September 30
--------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Potential Common Share Underlying:
Options 790,000 1,038,800 2,033,195
Purchase Rights -- -- 300,000
Warrants 139,494 2,928,801 25,188,021
Convertible Preferred Series A 11,867 (A) 11,867 (A) --
Convertible Preferred Series B 2,016,638 (B) 2,016,638 (B) --
Convertible Preferred Series C -- 3,621,120 (C) --
---------- ---------- ----------
2,957,999 9,617,226 27,521,216
========== ========== ==========
</TABLE>
(A) 118,667 Series A preferred shares at September 30, 1996 and September 30,
1997 converted at a ratio of 1:10.
(B) 2,016,638 Series B preferred shares at September 30, 1996 and September
30, 1997 converted at a ratio of 1:1.
(C) 2,600,000 Series C preferred shares at September 30, 1997 converted at a
ratio of 1.39:1. See further discussion in Note 9.
Reclassifications
Certain items have been reclassified to conform with the current
presentation. These reclassifications had no impact on net losses for any
period presented.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30,
----------------
1997 1998
------- -------
(In Thousands)
<S> <C> <C>
Network infrastructure..................................... $12,637 $19,758
Telecommunications equipment............................... 5,048 8,972
Building and improvements.................................. 1,328 1,328
Furniture, office equipment and other...................... 976 4,447
Leasehold improvements..................................... 508 633
Construction in process.................................... 428 11,882
------- -------
20,925 47,020
Accumulated depreciation................................... (594) (3,000)
------- -------
$20,331 $44,020
======= =======
</TABLE>
F-12
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of property and equipment acquired under
capital leases, included in the above:
<TABLE>
<CAPTION>
September 30,
--------------
1997 1998
------ ------
(In
Thousands)
<S> <C> <C>
Network infrastructure....................................... $6,000 $6,000
Telecommunications equipment................................. 219 219
Building and improvements.................................... 558 558
Furniture, office equipment and other........................ 474 519
------ ------
7,251 7,296
Accumulated depreciation..................................... (192) (613)
------ ------
$7,059 $6,683
====== ======
</TABLE>
NOTE 4--SHORT-TERM BORROWINGS
On August 29, 1997, the Company obtained a $1.0 million, 18% per annum,
short-term bridge loan with an institutional lender which was due on October
15, 1997. On September 17, 1997, the Company repaid $500,000 of the
outstanding principal balance associated with this loan, plus accrued interest
thereon, and extended the maturity date of the remaining principal balance of
$500,000 to March 16, 1998 through the consummation of a new loan agreement
with the lender. Simultaneous to the execution of the new loan agreement on
September 17, 1997, which was considered to be a substantial modification of
the original loan agreement which it superseded, the Company recognized an
extraordinary charge on debt extinguishment totaling $104,680. The
extraordinary charge consisted of the write-off of unamortized debt discount
and deferred financing costs associated with the original bridge loan. The
remaining $500,000 bridge loan balance was repaid during January 1998.
On September 2, 1997, the Company issued a $50,000, 10% per annum,
unsecured promissory note to a financial adviser of the Company as payment for
services performed in connection with the attainment of debt financing. The
note was repaid on October 2, 1997.
NOTE 5--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
-----------------
1997 1998
------- --------
(In Thousands)
<S> <C> <C>
13% Senior Discount Notes, net of unamortized discount
totaling $220,403,654 at September 30, 1998.............. $ -- $249,596
14% Revolving Credit Facility, net of unamortized discount
totaling $463,513 at September 30, 1997.................. 11,747 --
14% unsecured term note with a vendor; monthly
installments of principal and interest payable through
December 2000............................................ -- 150
Other..................................................... 17 10
------- --------
11,764 249,756
Less current portion...................................... (8) (30)
------- --------
$11,756 $249,726
======= ========
</TABLE>
F-13
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Aggregate principal maturities of long-term debt are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999.............................................................. $ 30
2000.............................................................. 89
2001.............................................................. 41
2002.............................................................. --
2003.............................................................. --
Thereafter........................................................ 470,000
---------
470,160
Less unamortized discount on the 13% Senior Discount Notes........ (220,404)
---------
$ 249,756
=========
</TABLE>
Senior Discount Notes
On April 13, 1998, the Company completed an offering of debt securities
pursuant to Rule 144A under the Securities Act of 1933, as amended (the Act),
for gross proceeds of $250.2 million (the High Yield Debt Offering). In the
High Yield Debt Offering, the Company sold 470,000 units consisting of 13%
Senior Discount Notes due 2008 (the Notes) and warrants to purchase an
aggregate of 3,713,094 shares of the Company's Series B common stock (Note
10). The Company allocated $235.2 million of the proceeds to the Notes and
$15.0 million to the warrants, representing their estimated fair value at the
date of issuance as determined via an independent valuation.
The Notes will accrete in value through April 15, 2003 at a rate of 13% per
annum, compounded semi-annually, at which time $470.0 million in aggregate
principal amount at maturity will be outstanding. Cash interest will neither
accrue nor be payable prior to April 15, 2003. Thereafter, cash interest on
the Notes will accrue and will be payable semi-annually in arrears on each
April 15 and October 15, commencing October 15, 2003, at a rate of 13% per
annum. The Company is not required to make mandatory redemption or sinking
fund payments with respect to the Notes prior to maturity. The Notes are
redeemable at the option of the Company, in whole or in part, at any time on
or after April 15, 2003, at a premium declining to par on April 15, 2006, plus
accrued and unpaid interest through the date of redemption. In the event of a
change in control, as defined in the indenture governing the Notes, the
holders of the Notes will have the right to require the Company to purchase
their Notes in an amount equal to 101% of the aggregate principal amount at
maturity or accreted value thereof, as applicable, plus accrued and unpaid
interest to the date of purchase.
The indenture pursuant to which the Notes are issued contains certain
covenants which, among other things, limit the ability of the Company and its
subsidiaries to incur additional indebtedness, issue stock in subsidiaries,
pay dividends or make other distributions, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company and its subsidiaries, and enter into
certain mergers and consolidations. The Company is in compliance with such
covenants at September 30, 1998.
Revolving Credit Facility
On September 16, 1997, the Company entered into a five-year $23.0 million
revolving credit facility (the Credit Facility) with a syndicate of lenders
(the Lenders) to provide financing for the construction of telecommunication
networks and for general working capital purposes. The Company terminated this
facility April 13, 1998, concurrent with the closing of the High Yield Debt
Offering, and paid the Lenders a $1.0 million
F-14
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
termination fee pursuant to the terms thereof. The Company has recorded an
extraordinary loss of $4.7 million associated with such debt extinguishment,
which loss is inclusive of the aforementioned termination fee and the write-
off of unamortized debt discount and deferred financing costs associated with
the Credit Facility.
NOTE 6--CONVERTIBLE BRIDGE NOTES
Convertible bridge notes outstanding at September 30, 1997 consist of
$406,000 in principal funding received through the issuance of 8%
subordinated, convertible bridge notes pursuant to a private placement in
fiscal 1997. On December 30, 1997, such convertible bridge notes were
converted into shares of the Company's Series A common stock and related
warrants at the conversion rate of $3.00 per share (Note 9).
NOTE 7--COMMITMENTS
Lease Commitments
The Company leases its office space, certain network access facilities
and fiber transport, and automobiles under noncancelable operating lease
arrangements which expire on varying dates through fiscal 2008. Rent expense
under noncancelable operating leases totaled $108,000, $361,000, and $549,000
during fiscal 1996, 1997 and 1998, respectively.
The Company has procured certain of its property and equipment, including
its Anaheim network central office switching facility, through capital leases
which expire through fiscal 2001. Additionally, the Company has accounted for
certain agreements with the City of Anaheim, as more fully described below and
which extend through fiscal 2027, as both capital leases and executory
contracts in the accompanying financial statements.
Future minimum payments under capital leases (inclusive of the minimum
payments allocated from the agreements with the City of Anaheim) and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
----------- -------- ---------
(In Thousands)
<S> <C> <C>
1999..................................................... $ 1,539 $1,207
2000..................................................... 1,396 1,190
2001..................................................... 1,290 1,206
2002..................................................... 1,277 1,112
2003..................................................... 1,277 224
Thereafter............................................... 30,015 463
-------- ------
Total minimum lease payments............................. 36,794 $5,402
-------- ======
Amount representing interest............................. (29,892)
--------
Present value of minimum lease payments.................. $ 6,902
========
</TABLE>
Commitments Relating to Agreements with the City of Anaheim
During February 1997, the Company and its wholly-owned subsidiary
FirstWorld Anaheim (FWA) entered into a 30-year Universal Telecommunications
System Participation Agreement (as amended, the UTS Agreement) with the City
of Anaheim, California (the City), under which FWA has agreed to design,
construct and operate a fiber-optic telecommunications network in cooperation
with the City. The UTS Agreement requires
F-15
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FWA to pay to the City (i) an annual payment in lieu of a franchise fee based
on a percentage of FWA's "adjusted gross revenues," as defined, related to the
Anaheim network, subject to a minimum annual payment of $1.0 million for
periods after June 30, 1999 through the term of the agreement, (ii) a
percentage of FWA's "net revenues," as defined, derived from the Anaheim
network, (iii) certain of the City's annual operating costs associated with
the UTS Agreement, not to exceed $175,000 per year prior to the commencement
of the third phase of the Anaheim network (as discussed below), and not to
exceed $350,000 per year thereafter, subject to inflationary adjustments, and
(iv) $20,000 per year to support the City's presence on the Internet, subject
to inflationary adjustments. The UTS Agreement also requires the Company to
deposit an amount equal to up to 15% of "net revenues" derived from the
Anaheim network, as defined, to fund and maintain a $6.0 million reserve
account for debt service and capital improvements. As of September 30, 1998,
no amounts have been deposited into such reserve account as "net revenues"
have not yet been generated from the Anaheim network. Pursuant to the UTS
Agreement, the City has been granted an irrevocable option to purchase all of
the issued and outstanding stock of FWA at anytime after July 1, 2012 for its
then current appraised fair value, the determination of which is to be derived
by qualified independent appraisers selected by both the Company and the City,
as more specifically defined within the UTS Agreement. Any sale or issuance of
FWA stock can only be made if such sale or issuance is expressly made subject
to the City's purchase option. Moreover, any sale of the Anaheim network or
other sale of substantially all of FWA's assets can only be made if the City
is equitably compensated for the loss of its future income stream under the
UTS Agreement or the buyer expressly assumes the obligations of FWA under the
UTS Agreement.
Simultaneous to the execution of the UTS Agreement, FWA entered into a
30-year Agreement for Use of Operating Property (the Operating Property
Agreement) with the City under which FWA has been granted the exclusive right
to lease 60 of 96 fiber strands contained in an approximate 50 mile loop of
fiber optic cable owned by the City, together with related facilities and
rights. Under the terms of the Operating Property Agreement, the Company is
obligated to make quarterly payments to the City in the amount of $114,000. In
addition, the Company is obligated to pay all costs associated with operating
and maintaining the leased property, including maintenance expenses, taxes,
insurance premiums and pole usage fees. FWA has the right to assign its rights
under the Operating Property Agreement, but will not be released from
liability unless the City expressly consents. FWA also has the right to
encumber its interest in the leased property.
Although the Company considers the Operating Property Agreement to be a
capital lease and the UTS Agreement to be an executory contract, certain of
the minimum payments prescribed by the UTS Agreement have been accounted for
as additional minimum capital lease payments. The Operating Property Agreement
and the UTS Agreement were bid, negotiated and consummated simultaneously with
each other. In addition, both agreements have identical 30-year terms and
include certain cross-default provisions. Moreover, the Operating Property
Agreement contains payment terms which are below the fair value of the
benefits conferred by such agreement; whereas, the UTS Agreement contains
payment terms which are above the fair value of the benefits conferred by such
agreement. Accordingly, the Company has allocated the collective payments
prescribed by the agreements between the two contracts based upon the
estimated fair value of the benefits the Company receives under each of the
two agreements. Future minimum payments prescribed by the UTS Agreement and
not allocated to the capital lease total $240,000, $373,000, $373,000,
$373,000, $373,000 and $8.8 million during each of fiscal 1999, 2000, 2001,
2002, 2003 and thereafter, respectively.
Pursuant to the UTS Agreement, FWA is required to meet certain future
performance requirements for the completion of network design and the
commencement of network construction related to certain phases of the citywide
network. The first phase, which extended service to identified municipal
facilities, was substantially completed in October 1997. The second phase
requires service to be extended in the ordinary course of business (i.e.,
within six months following execution of a customer service agreement) to
commercial, industrial and governmental customers within certain defined
service areas. The Company was required to complete 44% of
F-16
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the first and second phases by April 1, 1998 and is further required to
complete 90% of the first and second phases by December 31, 1998, plus a 180-
day cure period in each case. The Company has constructed and installed the
necessary infrastructure to satisfy the 44% completion requirement and expects
that the completion of infrastructure currently under construction and
approved for construction will satisfy the 90% completion requirement in a
timely manner. In the event that FWA does not meet the specified performance
deadlines related to completion of the first and second phases of the Anaheim
network due to financial or other reasons, the City may elect to either
terminate the Operating Property Agreement or to immediately exercise its
option to purchase all of the issued and outstanding stock of FWA under the
same option terms, as defined within the UTS Agreement, which otherwise do not
become effective until after July 1, 2012. Any termination of the Operating
Property Agreement would have a material adverse effect on the Company's
business, financial condition and results of operations.
Under the UTS Agreement, the third phase of the Anaheim network, which
allows service to be extended in the ordinary course of business to all
customers within the city, including residential customers, will be commenced
only after the economic feasibility of the third phase is validated by an
independent consultant's report and financing is arranged. FWA has agreed to
cause a feasibility study with respect to the third phase to be completed no
later than January 1, 2000, and thereafter to provide annual updates to the
study if necessary. If the Company determines not to proceed with the
development of the third phase of the Anaheim network, or if for any reason
the principal financing for the third phase is not funded or construction of
the third phase is not commenced by December 31, 2002, then the City may
pursue development of the third phase on its own.
The UTS Agreement also requires FWA to commence construction of a
demonstration center in the City's downtown area by November 30, 1998, and to
complete such demonstration center by June 30, 1999. However, as a result of a
change in the proposed scope of the project, FWA now contemplates leasing
additional office space in the downtown area of Anaheim and housing a
demonstration center in the leased facilities. The Company expects the
demonstration center to be operational prior to March 31, 1999. Although the
Company believes it is in compliance with its obligations with respect to the
demonstration center, the City has asserted its belief that the Company is not
satisfying such obligations. The parties are currently in the process of
attempting to resolve these issues. The Company does not believe that the
ultimate resolution will have a material adverse effect on the Company's
results of operations, liquidity or financial position.
Pursuant to a Development Fee Arrangement dated simultaneous to the
aforementioned City agreements, for a period of five years, commencing with
the earlier to occur of the closing of the financing for or the commencement
of construction of the first Additional Network (as defined below), the
Company must pay to the City a lump sum development fee for each Additional
Network which the Company develops ($300,000 for each Additional Network
financed in the first year; $200,000 for each Additional Network financed in
the second year; and $100,000 for each Additional Network financed in the
third, fourth and fifth years, which amounts must be paid within thirty days
following the closing of the principal financing for an Additional Network or
the commencement of construction of such Additional Network, whichever occurs
first). "Additional Network" means (a) any expansion of the Anaheim network
into one or more adjacent or nearby cities where FWA enters into a revenue
sharing agreement with any such city, and (b) any separate communications
system developed by any other subsidiary of the Company that holds a
Certificate of Public Convenience and Necessity issued by the Public Utilities
Commission and enters into a revenue sharing agreement with one or more public
entities.
Commitments Relating to Agreements with the Irvine Company
F-17
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On March 5, 1998, FirstWorld Orange Coast (FWOC), a wholly-owned
subsidiary of the Company, and The Irvine Company entered into two agreements
regarding FWOC's development of a network to serve certain areas that have
been or are planned to be developed by The Irvine Company (the Irvine
Network). The Company has guaranteed the payment obligations of FWOC under
each of such agreements.
Pursuant to an Agreement for Lease of Telecommunications Conduit dated as
of March 5, 1998 (the Conduit Lease), FWOC leases from The Irvine Company
space within two underground telecommunications tubes (the Conduit), and, in
connection therewith, has received the non-exclusive right to use undivided
space within the pull boxes serving such Conduit (collectively, the Leased
Premises). The Conduit Lease applies to (i) an existing Conduit system within
certain already-developed areas in the Irvine Spectrum and (ii) Conduit to be
constructed in the future in the as yet undeveloped areas of the Irvine
Spectrum. The Irvine Company may also install Conduit in other areas it may
develop in the cities of Irvine, Newport Beach and Tustin, and in
unincorporated areas of Orange County, and such areas may in the future be
incorporated into the Conduit Lease upon the mutual agreement of the parties
(Additional Areas). The term of the Conduit Lease runs through December 31,
2027.
The Conduit Lease obligates FWOC to install fiber optic cable (Cable) in
the Conduit pursuant to a phasing plan. A phase is completed when sufficient
Cable has been installed to enable FWOC to connect and provide service (for
that portion of the Irvine Network) to property abutting the Conduit. Upon
termination of the agreement, the Cable will be owned by The Irvine Company.
If FWOC fails to complete installation of the required Conduit within 18
months following March 5, 1998, The Irvine Company may, until such
installation is completed, terminate the Conduit Lease.
The Conduit Lease obligates FWOC to make quarterly rent payments to The
Irvine Company based upon its "adjusted gross revenue", as defined, from the
Irvine Network. In addition, FWOC is obligated to pay all costs associated
with its lease, operation, maintenance, repair and use of the Leased Premises,
including maintenance expenses, taxes and insurance premiums. Any assignment
of FWOC's rights under the Conduit Lease and any sale of a controlling
interest in FWOC require The Irvine Company's prior approval, and The Irvine
Company has a right of first refusal in the event of any such proposed sale.
Based upon its term, the Conduit Lease is a capital lease. However, as
such lease does not prescribe any fixed rental payments and as it is not
practicable for the Company to estimate any future probable contingent rental
payments associated with such lease, no amount has been capitalized in the
accompanying Consolidated Financial Statements. Contingent rental payments
associated with this lease are recorded as additional operating expenditures
when they become due pursuant to the lease.
Concurrently with the execution of the Conduit Lease, FWOC and The Irvine
Company executed a Telecommunications System License Agreement (the License
Agreement) which provides FWOC, with some exceptions, with the right and
obligation to provide telecommunications services to (i) the 106 buildings
currently owned by The Irvine Company in the Irvine Spectrum area, (ii)
commercial, industrial and retail buildings in the future owned by The Irvine
Company in the Irvine Spectrum, and (iii) under certain circumstances in The
Irvine Company's discretion, similar buildings located in the Additional Areas
and other locations in California.
The License Agreement requires FWOC to pay The Irvine Company a license fee
each calendar quarter, subject to an annual CPI increase that will not be less
than 2% or greater than 6%. The base license fee was initially $62,500 for the
buildings owned by Irvine in the Irvine Spectrum area at the time that the
License Agreement was consummated. Pursuant to the License Agreement, such fee
is increased or decreased over its term based on the rentable square footage of
the buildings that are from time to time subject to the License Agreement. As of
September 30, 1998, such fee totals $88,000 per calendar quarter. Future minimum
payments prescribed by the License Agreement, based upon this current fee and
assuming a 2% per annum upward CPI adjustment over its term, total approximately
$359,000, $366,000, $374,000, $381,000, $389,000 and $11.7 million during each
of fiscal 1999, 2000, 2001, 2002, 2003 and thereafter, respectively.
F-18
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The License Agreement provides FWOC with the right to install, maintain,
operate, replace and remove Cable and associated communications equipment
(Equipment) in, as well as access rights to, such buildings, subject to the
rights of The Irvine Company's tenants and to reasonable requirements and
procedures imposed by The Irvine Company. Except with respect to buildings
that are leased to a single tenant, The Irvine Company is required to provide
FWOC with a reasonable amount of equipment room space in each building,
sufficient to enable FWOC to install Cable and Equipment and deliver services.
FWOC's rights to a building are non-exclusive, meaning that The Irvine Company
can grant similar licenses to other service providers. Although all the Cable
becomes the property of The Irvine Company upon termination of the License
Agreement, FWOC has the right to remove and retain ownership of the Equipment,
subject to The Irvine Company's election to purchase the Equipment at a price
to be negotiated by the parties.
Subject to certain qualifications, FWOC will have the obligation to
provide telecommunications services to any tenant who wishes to subscribe with
FWOC for those services, and FWOC is required to install Cable and Equipment
in that tenant's building if FWOC owns or leases Conduit located within 1,000
feet of that building. Under certain circumstances, FWOC may be required to
provide completion and performance bonds to The Irvine Company in connection
with that work. To the extent that FWOC provides fiber optic service to a
building, it is required to achieve and maintain standards of minimum
reliability. Subject to force majeure, if there is a system-wide failure to
provide such service that exceeds five consecutive days, The Irvine Company
has the right to use the network (and if necessary bring in an alternative
service provider) and to charge its costs to FWOC.
Whenever FWOC is the first competitive access provider to a building, it
is required to install a building entrance conduit system (which connects the
building to the street access point) (a BECS), with a capacity equal to 200%
of the capacity required by FWOC to service the building. The Irvine Company
can grant other providers the right to use that BECS, but must pay or cause
that provider to pay FWOC 50% of FWOC's cost of installing the BECS, which
costs are subject to increase based on a CPI calculation. Where a BECS already
exists, The Irvine Company must make any excess capacity therein available to
FWOC.
Other Commitments
The Company is party to a contract with a long distance carrier pursuant
to which the Company is committed to minimum service fees. Such minimum fees
aggregate $488,000 and $1.4 million during fiscal 1999 and 2000, respectively.
The Company is party to a network services agreement with a provider of
voicemail and data services under which future minimum payments aggregate
$239,000, $287,000 and $24,000 during fiscal 1999, 2000 and 2001,
respectively. Additionally, the Company is party to an agreement with a
provider of data processing and billing services under which future minimum
payments aggregate $150,000 during each of fiscal 1999, 2000 and 2001.
During fiscal 1998, the Company entered into separate management
consulting service agreements with its two majority shareholders (or
affiliates thereof) whereby such parties will provide general management
consulting services to the Company for a period of three years commencing
January 1, 1998. Pursuant to such agreements, as amended, the Company is
required to pay to the related parties aggregate consulting fees totaling $1.0
million per annum. Related party consulting fees recorded by the Company
during fiscal 1998 totaled $840,000 which is included in selling, general and
administrative expenses in the accompanying consolidated financial statements.
Future minimum consulting fees under these agreements aggregate $1.0 million,
$1.0 million and $250,000 during each of fiscal 1999, 2000 and 2001,
respectively.
The Company is party to an arrangement with the owner of a retail
development located in Orange County, California, whereby it is required to
remit to the owner of such development a percentage of "adjusted gross
revenues", as defined, derived from serving tenant customers located within
such development.
F-19
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--CEO EMPLOYMENT AGREEMENT
On September 28, 1998, the Company entered into an Employment Agreement
(the Employment Agreement) pursuant to which the Company retained the services
of a new President and Chief Executive Officer (the CEO) effective October 1,
1998 (the Commencement Date). The Employment Agreement has a three-year term
ending on the close of business on September 30, 2001, unless terminated
earlier by either party, and provides an initial annual base salary of
$200,000 per annum. Additionally, the Employment Agreement granted the CEO an
Equalization Payment (as defined within the Employment Agreement) in the
amount of $4.0 million, payable in three separate installments. The first $2.0
million installment became due and was paid on October 1, 1998, the employment
Commencement Date, while the second and third $1.0 million installments are
due and payable on October 1, 1999 and October 1, 2000, respectively. The CEO
must be employed by the Company on the date that the second and third
installments become due to be eligible to receive such payments unless the
Company terminates the CEO's employment other than for cause or the CEO
terminates his own employment for good reason (as defined in the Employment
Agreement) prior to the installment date. In addition, the CEO may elect to
receive all or any portion of the second and third installment payments in the
form of the Company's Series B common stock. If the CEO elects to receive any
of the second or third installment payments in Series B common stock, such
stock shall be valued at $5.00 and $7.50 per share, respectively.
The Employment Agreement stipulates that the CEO will also be eligible
for the following performance-based bonuses: (i) if the Company consummates a
Qualified Initial Public Offering (as defined in the Employment Agreement)
with a price of at least $10.00 per share (subject to adjustment as set forth
in the Employment Agreement) within the first 18 months after the Commencement
Date, the Company will pay the CEO a $1.0 million cash bonus; (ii) if the
Company consummates a Qualified Initial Public Offering with a price of at
least $10.00 per share (subject to adjustment as set forth in the Employment
Agreement) before April 1, 2000, the Company will be obligated to pay the CEO
a $4.2 million cash bonus on September 30, 2001 (unless otherwise accelerated
as described in the Employment Agreement); (iii) if the Company consummates a
Qualified Initial Public Offering with a price of at least $12.50 per share
(subject to adjustment as set forth in the Employment Agreement) within the
first 24 months after the Commencement Date, the Company will be obligated to
pay the CEO a $8.4 million cash bonus on September 30, 2001 (unless otherwise
accelerated as described in the Employment Agreement); provided that if the
CEO earns the payment described in this clause (iii) he will not be entitled
to receive the payment described in clause (ii) above; and (iv) if the Company
has a market capitalization of at least $1.2 billion (as adjusted as described
in the Employment Agreement) for a period of 20 consecutive trading days
during a three-year period beginning on the Commencement Date, the Company
will be obligated to pay the CEO a cash payment equal to $16.8 million minus
any amounts he receives pursuant to clause (ii) or (iii) above on September
30, 2001 (unless otherwise accelerated as described in the Employment
Agreement).
The Employment Agreement also granted the CEO on October 1, 1998 an
option to purchase 2,805,000 shares of Series B common stock at an exercise
price of $6.00 per share (subject to anti-dilution protections set forth in
the Employment Agreement). The option vests (i) with respect to 1/3 of the
shares covered by the option on the Commencement Date, (ii) with respect to
1/3 of the shares covered by the option on the first anniversary of the
Commencement Date and (iii) with respect to the remaining 1/3 of the shares
covered by the option on the second anniversary of the Commencement Date
(unless otherwise accelerated in accordance with the terms of the Employment
Agreement).
NOTE 9--STOCKHOLDERS' EQUITY
Equity Recapitalization
On December 30, 1997, the Company (i) converted its three existing
classes of preferred stock into common stock in accordance with the automatic
conversion provision of its then existing charter in order to
F-20
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
simplify the Company's capital structure and to eliminate the rights,
preferences and privileges of the preferred stock; (ii) amended its Articles
of Incorporation to substantially increase the Company's authorized capital;
and (iii) amended its Articles of Incorporation to designate two series of
common stock, with the investors in the below-referenced private placement
occurring on December 30, 1997 receiving Series A common stock and all then
existing shares of common stock (including common stock issued upon conversion
of the then existing preferred stock) being designated as Series B common
stock. The Series A common stock and Series B common stock are identical in
all material respects, except that the holders of Series A common stock
possess ten votes per share on all matters subject to a vote of shareholders
while the holders of Series B common stock possess one vote per share.
Pursuant to the amended Articles of Incorporation, the Company may also issue
Preferred stock from time to time in one or more series. As of September 30,
1998, no such preferred stock has been issued.
Private Placements
On April 13, 1998, the Company consummated a private placement of equity
securities with Spectra 3 and Enron (the Additional Equity Investment)
pursuant to the exercise of an existing option held by Spectra 3 and Enron.
Pursuant to the Additional Equity Investment, the Company sold to each of
Spectra 3 and Enron 3,333,333 shares of Series B common stock, resulting in
aggregate offering proceeds totaling $18.8 million, net of offering
commissions. In connection with this private placement, the Company also
issued to each of Spectra 3 and Enron warrants to purchase an additional
3,333,333 shares of Series B common stock (Note 10).
On December 30, 1997, the Company consummated a private placement of
equity securities with Colorado Spectra 3, LLC (Spectra 3) and Enron Capital &
Trade Resources Corp. (Enron). In connection with this placement, the Company
issued 5,000,000 shares of newly created Series A common stock to each of
Spectra 3 and Enron at an issue price of $3.00 per share pursuant to a common
stock purchase agreement by and among the Company, Enron, Spectra 3 and the
holders (the Noteholders) of $406,000 in principal amount of the Company's
convertible subordinated bridge notes (Note 6). The Company also issued an
aggregate of 135,164 shares of Series A common stock to the Noteholders upon
the automatic conversion of the bridge notes pursuant to the terms thereof at
a conversion price of $3.00 per share. Aggregate proceeds from this offering,
exclusive of the conversion of the bridge notes, totaled $26.1 million, net of
offering commissions and certain other advisory fees paid in connection with
the consummation of this equity placement. In connection with this private
placement, the Company also issued i) to each of Spectra 3 and Enron warrants
to purchase 5,000,000 shares of newly created Series B common stock, and ii)
to the Noteholders warrants to purchase an aggregate of 135,164 shares of such
Series B common stock (Note 10).
On January 31, 1997, in connection with a private placement offering, the
Company issued 2,600,000 shares of Series C preferred stock, consisting of
1,044,700 shares issued for cash proceeds totaling $4.5 million, net of
placement agent commissions and related fees, and 1,555,300 shares issued
through the retirement of convertible bridge notes at $5.00 per share. In
connection with this offering, the holders of Series C shares also received
warrants for the purchase of 520,000 shares of common stock (Note 10).
During fiscal 1996, in connection with various private placement
offerings, the Company issued 1,142,304 shares of Series B preferred stock for
proceeds totaling $2.4 million.
Delaware Reincorporation
Effective June 26, 1998, the Company changed its state of incorporation
from California to Delaware. In connection therewith, a par value equal to
$.0001 per share was assigned to each series of common and preferred stock. As
a result, the Consolidated Statement of Stockholders' Equity for fiscal 1998
reflects a reclassification to additional paid-in capital for the amounts in
excess of par value.
F-21
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--WARRANTS
During fiscal 1996, 1997 and 1998, the Company's non-employee warrant
activity was as follows:
In connection with the High Yield Debt Offering which was consummated on
April 13, 1998, the Company issued to the initial purchasers of the Notes
warrants to purchase 3,713,094 shares of Series B common stock at an exercise
price of $0.01 per share. Such warrants are exercisable at any time on or
after the earlier to occur of May 1, 1999, an initial public offering of the
Company's common stock or in the event of a change in control, as defined in
the warrant agreement, and expire on April 15, 2008. Such warrants contain
customary adjustments to protect against dilution, as well as certain
additional anti-dilutive adjustments as defined in the warrant agreement. As
of September 30, 1998, all of these warrants remain outstanding.
In connection with the April 13, 1998 private placement of Series B
common stock, the Company issued warrants for the purchase of 6,666,666 shares
of Series B common stock to the investors therein. Such warrants were issued
with an exercise price of $3.00 per share, contain customary adjustments to
protect against dilution, and may be exercised at any time prior to the first
to occur of (i) April 13, 2005; (ii) the merger of the Company with or into
another entity in which the shareholders of the Company immediately prior to
the merger own less than 50% of the voting securities of the surviving entity
immediately following the merger; and (iii) the sale by the Company of all or
substantially all of its assets. As of September 30, 1998, all of these
warrants remain outstanding.
In connection with the December 30, 1997 private placement of Series A
common stock, the Company issued warrants for the purchase of 10,135,164
shares of Series B common stock to the investors therein. Such warrants were
issued with an exercise price of $3.00 per share, contain customary
adjustments to protect against dilution, and may be exercised at any time
prior to the first to occur of (i) December 30, 2004; (ii) the merger of the
Company with or into another entity in which the shareholders of the Company
immediately prior to the merger own less than 50% of the voting securities of
the surviving entity immediately following the merger; and (iii) the sale by
the Company of all or substantially all of its assets. As of September 30,
1998, all of these warrants remain outstanding.
In connection with the private placement of Series A common stock
referred to above, the Company also issued to certain financial advisors
warrants to purchase 17,500 and 30,000 shares of Series B common stock at
exercise prices of $6.00 and $5.00, respectively, all of which have terms of
five years and contain customary adjustments to protect against dilution. As
of September 30, 1998, all of these warrants remain outstanding.
During fiscal 1997, in connection with the attainment of a revolving
credit facility, the Company issued to the lender warrants to purchase 800,000
shares of common stock. Such warrants were issued with an exercise price of
$6.00 per share, a term of five years, and contain customary adjustments to
protect against dilution, as well as certain additional anti-dilutive
adjustments as defined in the warrant agreement. As a result of the capital
transaction and the equity recapitalization which occurred on December 30,
1997, these warrants are currently exercisable into 800,000 shares of Series B
common stock at an exercise price of $3.00 per share. As of September 30,
1998, all of these warrants remain outstanding.
In connection with the consummation of the credit facility described
above, the Company also issued to certain financial advisors warrants to
purchase 83,400 shares of common stock, which warrants have an exercise price
of $6.00 and a term of five years. As a result of the equity recapitalization
which occurred on December 30, 1997, these warrants are currently exercisable
into shares of Series B common stock. As of September 30, 1998, all of these
warrants remain outstanding.
During fiscal 1997, in connection with the attainment of short-term
bridge financing, the Company issued to the lender warrants to purchase
300,000 shares of common stock. Such warrants were issued with an exercise
price of $6.00 per share, a term of seven years, and contain customary
adjustments to protect against
F-22
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dilution, as well as certain additional anti-dilutive adjustments as defined
in the warrant agreements. As a result of the capital transaction and the
equity recapitalization which occurred on December 30, 1997 and the capital
transaction occurring on April 13, 1998, such warrants are currently
exercisable into 470,092 shares of Series B common stock at an exercise price
of $3.83 per share. As of September 30, 1998, all of these warrants remain
outstanding.
During fiscal 1997, in connection with the issuance of convertible bridge
notes, warrants for the purchase of 33,789 shares of common stock were issued
to the note holders. Such warrants, which expire in July 2002, have an
exercise price of $6.00 per share and contain customary adjustments to protect
against dilution. As a result of the equity recapitalization which occurred on
December 30, 1997, these warrants are currently exercisable into shares of
Series B common stock. As of September 30, 1998, all of these warrants remain
outstanding.
During fiscal 1997, the Company issued to certain legal service providers
warrants to purchase 19,000 and 5,000 shares of common stock at exercise
prices of $.50 and $5.00, respectively. Such warrants have terms of five years
and contain customary adjustments to protect against dilution. As a result of
the equity recapitalization which occurred on December 30, 1997, these
warrants are currently exercisable into shares of Series B common stock. As of
September 30, 1998, all of these warrants remain outstanding.
During fiscal 1997, the Company issued a warrant for the purchase of
800,000 shares of common stock to a single investor for cash proceeds totaling
$200,000, which warrant has a term of five years. As issued, the original
warrant agreement contained a complex anti-dilution provision pursuant to
which the number of underlying common shares and exercise price per common
share would have been adjusted based upon the occurrence of certain future
events, as defined in the warrant agreement. On December 30, 1997, the warrant
agreement was amended whereby the number of shares purchasable under the
warrant was set at 2,110,140 shares of Series B common stock with an exercise
price of $1.80 per share. This warrant, as amended, remains subject to certain
customary adjustments to protect against dilution. As of September 30, 1998,
no shares have been issued pursuant to this warrant.
In connection with a fiscal 1997 private placement of Series C preferred
stock, the Company issued warrants for the purchase of 520,000 shares of
common stock to the investors. Such warrants were issued with an exercise
price of $5.00 per share, a term of five years, and contain customary
adjustments to protect against dilution, as well as certain additional anti-
dilutive adjustments as defined in the warrant agreements. As a result of the
capital transactions which occurred on December 30, 1997 and April 13, 1998,
such warrants are currently exercisable into 736,564 shares of Series B common
stock at an exercise price of $3.53 per share. As of September 30, 1998, all
of these warrants remain outstanding.
In connection with the private placement of Series C preferred stock
referred to above, the Company also issued to certain financial advisors
warrants to purchase 218,118 and 15,000 shares of common stock at exercise
prices of $5.00 and $.50, respectively, all of which have terms of five years
and contain customary adjustments to protect against dilution. During fiscal
1997, 5,000 of the $.50 warrants were exercised for proceeds totaling $2,500.
As a result of the equity recapitalization which occurred on December 30,
1997, the remaining outstanding warrants are currently exercisable into shares
of Series B common stock. As of September 30, 1998, all of the remaining
warrants remain outstanding.
As a result of the equity recapitalization which occurred on December 30,
1997, outstanding warrants to purchase 139,494 shares of Series B preferred
stock, as previously issued in fiscal 1994, are currently exercisable into
shares of Series B common stock. Such warrants expire in April 1999 and
contain customary adjustments to protect against dilution. As of September 30,
1998, all of these warrants remain outstanding.
F-23
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of the above-referenced warrants was determined at their
time of grant via application of the Black-Scholes option pricing model or,
with respect to those warrants issued in connection with the High Yield Debt
Offering, based on an independent valuation.
The following table summarizes information about warrants outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------ -----------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
Range of as of Remaining Average as of Average
Exercise September 30, Contractual Exercise September 30, Exercise
Prices 1998 Life (years) Price 1998 Price
---------- ------------- ------------ --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$ .01 3,713,094 9.6 $ .01 -- --
$ .50 29,000 3.3 $ .50 29,000 $ .50
$1.50-1.80 2,249,634 3.1 $1.78 2,249,634 $1.78
$3.00-3.83 18,808,486 6.1 $3.04 18,808,486 $3.04
$5.00-6.00 387,807 3.6 $5.35 387,807 $5.35
---------- ----------
25,188,021 21,474,927
========== ==========
</TABLE>
NOTE 11--STOCK OPTIONS AND PURCHASE RIGHTS
The Company has a 1995 Incentive Stock Option Plan (the 1995 Plan) and a
1997 Stock Plan (the 1997 Plan) (collectively, the Plans) under which stock
options or stock purchase rights to acquire an aggregate of 1,500,000 shares
and 1,500,000 shares, respectively, of Series B common stock may be granted to
employees and directors of the Company, as well as to non-employee consultants
of the Company under the 1997 Plan. Both plans provide for the granting of
incentive stock options (within the meaning of Section 422A of the Internal
Revenue Code) while the 1997 Plan also provides for the granting of non-
statutory stock options. Additionally, stock purchase rights may also be
granted under the 1997 Plan.
The terms of stock options granted under the Plans are determined by the
Board of Directors. Stock options may be granted for periods of up to ten
years at a price per share not less than the fair market value of the
Company's Series B common stock at the date of grant for incentive stock
options and not less than 85% of the fair market value of the Company's Series
B common stock at the date of grant for non-statutory stock options. In the
case of incentive and non-statutory stock options granted under Plans to
employees, directors or consultants who, at the time of grant of such options,
own stock representing more than 10% of the voting power of all classes of
stock of the Company, the exercise price shall be no less than 110% of the
fair market value of the Company's Series B common stock at the date of grant.
Additionally, the term of incentive stock option grants under the Plans is
limited to five years if the grantee owns in excess of 10% of the voting power
of all classes of stock of the Company at the time of grant. Options granted
under the Plans generally vest to the option holder ratably over a period of
four to five years beginning on the grant date. The terms of stock purchase
rights granted under the 1997 Plan are determined by the Board of Directors.
Such purchase rights may be issued either alone, in addition to, or in tandem
with other awards granted under the 1997 Plan and/or cash awards made outside
of the 1997 Plan.
The Company has a 1998 Stock Purchase Plan (the 1998 Plan) pursuant to
which it may grant to key employees and directors stock purchase rights to
acquire an aggregate of 500,000 shares of Series B common stock. The terms of
stock purchase rights granted under the 1998 Plan are determined by the Board
of Directors. Under the 1998 Plan, up to 50% of the aggregate purchase price
for shares subject to stock purchase rights may be paid by the offeree in the
form of a promissory note to the Company.
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss as if the minimum value method had
F-24
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
been applied in measuring compensation expense. Had compensation cost for the
Company's stock-based compensation plans been determined based on the minimum
value method at the grant dates for awards under this plan consistent with the
method prescribed by Statement of Financial Accounting Standards No. 123, the
Company's net loss would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1996 1997 1998
------------ ------------ -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net loss:
As reported................... $ 3,856 $ 9,553 $ 33,356
Pro forma..................... $ 3,860 $ 9,564 $ 33,434
Earnings per Share:
As reported, basic and
diluted...................... $ (1.38) $ (2.98) $ (1.81)
Pro forma, basic and diluted.. $ (1.38) $ (2.98) $ (1.82)
</TABLE>
The minimum value of each option and stock purchase right grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants during fiscal
1996, 1997 and 1998: dividend yield of 0.0% for all periods; volatility of
0.0% for all periods; risk-free interest rates of 5.79%, 6.07% and 5.88%; and
an expected life of 5.0 years for all periods, except with respect to stock
purchase rights granted during fiscal 1998, which rights have a term of 17
years. The weighted average fair value of options and stock purchase rights
granted during fiscal 1996, 1997 and 1998 was approximately $.06, $.09 and
$.57, respectively.
Stock option and stock purchase right transactions during the three
fiscal years ended September 30, 1998, all of which relate to employee
transactions, are summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Stock Average
Exercise Purchase Exercise
Options Price Rights Price
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at September 30, 1995.... 763,333 $ .15 -- --
Granted............................ 788,667 $ .25 -- --
Exercised.......................... (330,000) $ .22 -- --
Canceled........................... (432,000) $ .21 -- --
--------- -------
Outstanding at September 30, 1996.... 790,000 $ .18 -- --
Granted............................ 489,400 $ .82 -- --
Exercised.......................... (101,900) $ .22 -- --
Canceled........................... (138,700) $ .48 -- --
--------- -------
Outstanding at September 30, 1997.... 1,038,800 $ .44 -- --
Granted............................ 1,420,766 $3.71 300,000 $4.50
Exercised.......................... (350,517) $ .35 -- --
Canceled........................... (75,854) $2.44 -- --
--------- -------
Outstanding at September 30, 1998.... 2,033,195 $2.66 300,000 $4.50
========= =======
</TABLE>
F-25
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options and stock
purchase rights outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------ -----------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
Range of as of Remaining Average as of Average
Exercise September 30, Contractual Exercise September 30, Exercise
Prices 1998 Life (years) Price 1998 Price
-------- ------------- ------------ --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Stock Options
$.15 -.25 301,000 7.2 $ .22 253,600 $ .22
$.50 341,400 8.2 $ .50 153,840 $ .50
$3.00 721,960 9.2 $3.00 453,753 $3.00
$4.50 668,835 9.8 $4.50 181,196 $4.50
--------- ---------
2,033,195 1,042,389
========= =========
Stock Purchase
Rights
$4.50 300,000 .13 $4.50 300,000 $4.50
========= =========
</TABLE>
The Company's Board of Directors approved a repricing of stock options in
December 1997, pursuant to which the exercise price of certain stock options
designated at $3.20 per share was reduced to $3.00 per share.
NOTE 12--INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
September 30,
-----------------
1997 1998
------- --------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards.......................... $ 4,734 $ 11,523
High yield debt interest deductible when paid............. -- 4,946
Accrued employee costs.................................... 40 70
Depreciation and amortization............................. (79) (1,538)
------- --------
4,695 15,001
Valuation allowance....................................... (4,695) (15,001)
------- --------
Deferred tax assets (liabilities), net.................... $ -- $ --
======= ========
</TABLE>
As of September 30, 1998, the Company has federal and state net operating
loss carryforwards of approximately $37.4 million and $24.0 million,
respectively, which amounts expire beginning in fiscal 2009 and fiscal 2000,
respectively. As a result of the private equity placement which occurred on
December 30, 1997 (Note 9), which resulted in a change of ownership as defined
by Section 382 of the Internal Revenue Code, the Company's utilization of net
operating loss carryforwards generated through December 30, 1997 will be
subject to an annual limitation of approximately $878,000 for both federal and
state tax purposes, the effect of which has been reflected in the summary of
deferred tax assets above. Additionally, if the Company is able to recognize
certain built-in gains in the future, the annual utilization rate of the net
operating losses would be increased. If the Company were to recognize certain
built-in losses, they will be subject to the annual utilization limitation
when recognized.
F-26
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Based upon the Company's lack of prior earnings history and other
available evidence, management has recorded a full valuation allowance for the
benefit of deferred tax assets. A reconciliation of the income tax benefit
computed using the U.S. federal statutory rate (34%) and the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
1996 1997 1998
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Computed expected federal tax benefit.............. $(1,311) $(3,248) $(11,341)
Non-deductible high yield debt interest............ -- -- 684
State income taxes, net of federal benefit......... (356) 161 (1,069)
Change in valuation allowance...................... 1,690 2,427 10,306
Section 382 net operating loss limitations......... -- 557 1,458
Other.............................................. (23) 103 (38)
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
NOTE 13--LEGAL PROCEEDINGS
On October 16, 1998, the Company filed a declaratory relief action in San
Diego Superior Court, asking the Court to find that the Company is not
obligated to offer stock to Dina Partners L.P. (Dina) with respect to the
December 30, 1997 equity investment by Spectra 3 and Enron (Note 9). Dina had
previously indicated in conversations with FirstWorld officers and counsel and
in writing that it believed the Company had breached a certain Amended and
Restated Investor Rights Agreement to which the Company and Dina were parties
by refusing to allow Dina to purchase additional stock in the Company. On
December 3, 1998, in answer to the Company's complaint, Dina filed a general
denial with the court. Although the ultimate resolution of this dispute is
subject to the uncertainties inherent in litigation, the Company does not
believe that the resolution of the declaratory relief action will have a
material adverse effect on the Company's results of operations, liquidity or
financial position.
NOTE 14--SUBSEQUENT EVENTS
On October 8, 1998, the Company commenced an offer to exchange (the
Exchange Offer) its outstanding 13% Senior Discount Notes due 2008 (the
Original Notes) for a new issue of 13% Senior Discount Notes due 2008, which
were registered with the Securities and Exchange Commission pursuant to a
Registration Statement on Form S-4 (the Exchange Notes). The Exchange Offer
expired on November 9, 1998. Under the terms of the Exchange Offer, the
Company accepted for exchange all $470.0 million in aggregate principal amount
at maturity of Original Notes and caused the cancellation of the Original
Notes and the issuance of the Exchange Notes.
On October 16, 1998, the Board of Directors of the Company elected to
change the Company's fiscal year end from September 30 to December 31,
commencing with the short fiscal year ending on December 31, 1998. The Company
intends to file a transition report on Form 10-Q with the Securities and
Exchange Commission for the period from October 1, 1998 through December 31,
1998.
On November 1, 1998, the Company adopted a 401(k) retirement plan (the
Plan) pursuant to which eligible employees may elect to defer up to 20% of
their compensation into the Plan up to a maximum of $10,000 per annum. The
Plan also stipulates that the Company may provide discretionary matching
contributions to the participants of the Plan, which matching contributions
would be allocated to the participants on December 31 of each Plan year and
would vest to the participants at the rate of 25% per annum. All
administrative expenses of the Plan will be borne by the Company.
F-27
<PAGE>
On November 24, 1998, pursuant to a Stock Purchase Agreement between the
Company and Enron Communications, Inc. (ECI), the Company purchased for cash
all of the outstanding capital stock of Optec, Inc. (Optec) from ECI. ECI is
the parent company of Enron Capital & Trade Resources Corp., a principal
stockholder of the Company. Optec is a telecommunications systems integrator
with operations in Oregon and Washington. Simultaneous to such transaction,
the Company also purchased from ECI an indefeasible right of use to fiber
optic cable in a metropolitan area network serving Portland with routes
connecting Beaverton and Hillsboro, Oregon. In addition, the Company obtained
rights to OC-3 level capacity on a wide area network being developed by ECI
that will connect up to 15 cities nationwide. The Company paid an aggregate of
$18.3 million for the Optec capital stock, the indefeasible rights of use and
the wide area network rights. The Company also repaid at closing approximately
$4.0 million of Optec's indebtedness to ECI. The Company has deposited
$1.0 million of the total purchase price into an escrow account to be held for
a three year period for the purpose of satisfying any claim made by the
Company for breach of any representations, warranties or covenants made by ECI
in the agreement relating to the Company's purchase of the Optec capital
stock.
During the period October 1998 to December 1998, the Company entered into
certain employment agreements with key executive officials. Future minimum
salaries prescribed by such agreements, inclusive of equalization payments (as
defined in such agreements), total $688,000, $805,000, $421,000 and $31,000
during each of fiscal 1999, 2000, 2001 and 2002, respectively. Pursuant to
such agreements, the Company has also granted or committed to grant to the
executives a total of 950,000 options to purchase Series B common stock at
exercise prices that range from $4.50 to $7.50 per share.
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FirstWorld Communications, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of FirstWorld Communications, Inc. and its subsidiaries at December
31, 1998 and September 30, 1999, and the results of their operations and their
cash flows for the three months ended December 31, 1998 and the nine months
ended September 30, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Denver, Colorado
December 14, 1999, except as to Note 14, which is as of December 22, 1999
F-29
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................... $ 29,659 $ 58,162
Marketable securities.............................. 170,030 30,523
Accounts receivable, net of allowance for doubtful
accounts of $120 and $1,100, respectively 4,663 8,154
Revenues in excess of billings..................... 1,539 2,068
Prepaid expenses and other......................... 2,627 3,538
-------- --------
Total current assets.............................. 208,518 102,445
-------- --------
Property and equipment, net......................... 61,247 100,825
Deferred financing costs, net....................... 8,259 7,563
Goodwill and intangibles, net of accumulated
amortization of $97 and $8,200, respectively 16,410 64,727
Other assets........................................ 382 2,139
-------- --------
Total assets...................................... $294,816 $277,699
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable................................... $ 13,573 $ 21,515
Accrued payroll related liabilities................ 1,156 2,962
Other accrued liabilities.......................... 2,866 7,833
Long-term debt, current portion.................... 75 115
Capital lease obligations, current portion......... 259 751
-------- --------
Total current liabilities......................... 17,929 33,176
-------- --------
Long-term debt, net of current portion and discount
................................................... 258,135 284,587
Capital lease obligations, net of current portion... 6,958 7,587
-------- --------
Total liabilities................................. 283,022 325,350
-------- --------
Commitments and contingent liabilities (Notes 6, 8
and 12)............................................ -- --
Stockholders' equity (deficit):
Preferred stock, $.0001 par value per share,
10,000,000 shares authorized; no shares
outstanding....................................... -- --
Common stock, voting, $.0001 par value, 100,000,000
shares authorized;
Series A, 10,135,164 shares designated; 10,135,164
shares issued and outstanding at December 31,
1998 and September 30, 1999 ..................... 1 1
Series B, 89,864,836 shares designated; 16,137,958
and 18,564,926 shares issued and outstanding at
December 31, 1998 and September 30, 1999,
respectively 2 2
Additional paid-in capital.......................... 45,830 58,661
Warrants............................................ 31,963 31,963
Stockholder receivables............................. (158) (45)
Accumulated deficit................................. (65,844) (138,233)
-------- --------
Total stockholders' equity (deficit).............. 11,794 (47,651)
-------- --------
Total liabilities and stockholders' equity
(deficit)........................................ $294,816 $277,699
======== ========
</TABLE>
See notes to consolidated financial statements.
F-30
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Ended
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Revenue:
Internet services................................................................................. $ 13,203 $ 123
Web integration and consulting services........................................................... 20,013 2,285
Telephony services................................................................................ 3,246 565
---------- ----------
Total revenue................................................................................... 36,462 2,973
---------- ----------
Operating expenses:
Network and service costs......................................................................... 25,776 2,707
Selling, general and administrative (Note 12)..................................................... 45,955 10,812
Depreciation and amortization..................................................................... 14,924 1,812
---------- ----------
Total operating expenses........................................................................ 86,655 15,331
---------- ----------
Loss from operations................................................................................ (50,193) (12,358)
Other income (expense):
Interest income................................................................................... 5,929 3,227
Interest expense.................................................................................. (28,125) (8,600)
---------- ----------
Total other expense............................................................................. (22,196) (5,373)
---------- ----------
Net loss............................................................................................ $ (72,389) $ (17,731)
========== ==========
Net loss per common share--basic and diluted........................................................ (0.68) (2.64)
========== ==========
Weighted average shares outstanding--basic and diluted.............................................. 26,196,664 27,471,288
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Series A Series B Total
Common Stock Common Stock Additional Stockholders'
----------------- ----------------- Paid-in Stockholder Accumulated Equity
Shares Amount Shares Amount Capital Warrants Receivables Deficit (Deficit)
---------- ------ ---------- ------ ---------- -------- ----------- ----------- -------------
(Note 1) (Note 1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1,
1998................... 10,135,164 $ 1 15,929,708 $ 2 $45,617 $31,963 $ (97) $ (48,113) $ 29,373
Proceeds from issuance
of stock and related
warrants............... -- -- 42,250 -- 190 -- (61) -- 129
Shares issued in
connection with the
exercise of options.... -- -- 166,000 -- 23 -- -- -- 23
Net loss for the three
months ended December
31, 1998............... -- -- -- -- -- -- -- (17,731) (17,731)
---------- --- ---------- --- ------- ------- ----- --------- --------
Balance at December 31,
1998................... 10,135,164 1 16,137,958 2 45,830 31,963 (158) (65,844) 11,794
Shares issued in
connection with
acquisitions........... -- -- 1,820,428 -- 9,924 -- -- -- 9,924
Shares issued in
connection with the
exercise of options and
warrants............... -- -- 606,540 -- 1,015 -- -- -- 1,015
Charge associated with
stock sold by
shareholders (Note
12).................... -- -- -- -- 1,892 -- -- -- 1,892
Write-off of stockholder
receivables............ -- -- -- -- -- -- 113 -- 113
Net loss for the nine
months ended September
30, 1999............... -- -- -- -- -- -- -- (72,389) (72,389)
---------- --- ---------- --- ------- ------- ----- --------- --------
Balance at September 30,
1999................... 10,135,164 $ 1 18,564,926 $ 2 $58,661 $31,963 $ (45) $(138,233) $(47,651)
========== === ========== === ======= ======= ===== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Three Months Ended September 30,
December 31, 1998 1999
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................. $ (17,731) $ (72,389)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and amortization expense.................................................. 1,812 14,924
Amortization of deferred financing costs............................................... 243 696
Accretion of senior notes.............................................................. 8,323 26,041
Charge associated with stock sold by shareholders...................................... -- 1,892
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable................................................................... (1,449) (1,387)
Other assets.......................................................................... 962 120
Accounts payable...................................................................... 6,119 5,510
Accrued payroll related liabilities................................................... 555 1,389
Revenue in excess of billings......................................................... -- (746)
Other liabilities..................................................................... 1,300 1,473
--------- ---------
Net cash provided (used) by operating activities..................................... 134 (22,477)
--------- ---------
Cash flows from investing activities:
Purchases of held-to-maturity marketable securities...................................... (127,212) (168,991)
Maturities of held-to-maturity marketable securities..................................... 122,773 308,498
Acquisitions, net of cash acquired....................................................... (22,307) (44,761)
Purchase of property and equipment....................................................... (15,518) (42,798)
--------- ---------
Net cash provided (used) by investing activities..................................... (42,264) 51,948
--------- ---------
Cash flows from financing activities:
Principal payments on debt and capital leases............................................ (117) (1,983)
Proceeds from exercise of stock options and warrants..................................... 23 1,015
Proceeds from issuance of Series B Common Stock and related warrants..................... 129 --
Payment of deferred financing costs...................................................... (285) --
--------- ---------
Net cash used by financing activities................................................ (250) (968)
--------- ---------
Net increase (decrease) in cash and cash equivalents...................................... (42,380) 28,503
Cash and cash equivalents, beginning of period............................................ 72,039 29,659
--------- ---------
Cash and cash equivalents, end of period.................................................. $ 29,659 $ 58,162
========= =========
Supplemental cash flow information:
Effects of acquisitions:
Assets acquired......................................................................... $ 24,617 $ 63,341
Liabilities assumed..................................................................... (2,310) (8,656)
Common stock issued..................................................................... -- (9,924)
Less cash paid.......................................................................... (22,307) (45,431)
--------- ---------
Net cash acquired from acquisitions.................................................. $ -- $ (670)
========= =========
Cash paid for interest............................................................... $ 110 $ 685
========= =========
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
FirstWorld Communications, Inc. (the "Company") commenced operations in
July 1992. On January 29, 1998, the Company changed its name to FirstWorld
Communications, Inc. from SpectraNet International. Effective June 26, 1998,
the Company changed its state of incorporation from California to Delaware. On
October 16, 1998, the Board of Directors of the Company (the "Board") voted to
change the Company's fiscal year end from September 30 to December 31,
beginning with a short period ending on December 31, 1998. Accordingly, the
Company filed a transition report on Form 10-Q with the Securities and
Exchange Commission for such period.
The Company is a network-based provider of Internet, data and
communications services. The Company's service offerings include high-speed
Internet access, such as dedicated access and digital subscriber line ("DSL");
web hosting and design; data center co-location; e-commerce solutions; dial-up
Internet access; and web integration and consulting services. To complement
its data services offerings, the Company also provides local, long distance
and other telephony services in selected markets. The Company's strategy is to
offer its customers a single source solution to meet the full range of the
increasingly complex Internet, data and communications needs. The Company
markets its services, using a consultative sales approach, to small- and
medium-sized businesses, and also selectively to larger businesses, consumers
and wholesale customers.
Equity Recapitalization
On December 30, 1997, the Company (i) converted its three existing classes
of preferred stock into common stock in accordance with the automatic
conversion provision of its then existing charter in order to simplify the
Company's capital structure and to eliminate the rights, preferences and
privileges of the preferred stock; (ii) amended its Articles of Incorporation
to substantially increase the Company's authorized capital; and (iii) amended
its Articles of Incorporation to designate two series of common stock (See
December 30, 1997 Private Placement below). The Series A common stock and
Series B common stock are identical in all material respects, except that the
holders of Series A common stock possess ten votes per share on all matters
subject to a vote of shareholders while the holders of Series B common stock
possess one vote per share. Pursuant to the amended Articles of Incorporation,
the Company may also issue Preferred stock from time to time in one or more
series. As of September 30, 1999, no such preferred stock has been issued.
Private Placements
On April 13, 1998, the Company consummated a private placement of equity
securities with entities controlled by the majority shareholder (the "Sturm
Entities") and Enron Communications, Inc. ("Enron Communications") pursuant to
the exercise of an existing option held by the Sturm Entities and Enron
Communications (the "Additional Equity Investment"). Pursuant to the
Additional Equity Investment, the Company sold to each of the Sturm Entities
and Enron Communications 3,333,333 shares of Series B common stock, resulting
in aggregate offering proceeds totaling $18.8 million, net of offering
commissions. In connection with this private placement, the Company also
issued to each of the Sturm Entities and Enron Communications warrants to
purchase an additional 3,333,333 shares of Series B common stock (Note 9).
Enron Communications subsequently transferred its shares and warrants to an
affiliate.
On December 30, 1997, the Company consummated a private placement of equity
securities with the Sturm Entities and Enron North America Corp. ("ENA"). In
connection with this placement, the Company issued 5,000,000 shares of newly
created Series A common stock to each of the Sturm Entities and ENA at an
issue price of $3.00 per share pursuant to a common stock purchase agreement
by and among the Company, the Sturm Entities, ENA and certain noteholders. The
Company also issued an aggregate of 135,164 shares of Series A common stock to
noteholders upon the automatic conversion of certain notes pursuant to the
terms thereof at a
F-34
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
conversion price of $3.00 per share. Aggregate proceeds from this offering,
exclusive of the conversion of the notes, totaled $26.1 million, net of
offering commission fees paid in connection with the consummation of this
equity placement. In connection with this private placement, the Company also
issued to each of the Sturm Entities and ENA warrants to purchase 5,000,000
shares of newly created Series B common stock; and to noteholders, warrants to
purchase an aggregate of 135,164 shares of such Series B common stock (Note
9). ENA subsequently transferred its shares and warrants to an affiliate.
On January 31, 1997, in connection with a private placement offering, the
Company issued 2,600,000 shares of Series C preferred stock, consisting of
1,044,700 shares issued for cash proceeds totaling $4.5 million, net of
placement agent commissions and related fees, and 1,555,300 shares issued
through the retirement of certain convertible notes at $5.00 per share. In
connection with this offering, the holders of Series C shares also received
warrants for the purchase of 520,000 shares of Series B common stock (Note 9).
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of FirstWorld
Communications, Inc. and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the financial statement
date, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents. The Company invests primarily in high-grade, short-term
investments that consist of money market instruments, commercial paper and
government agency issues.
Marketable Securities
Marketable securities consist principally of commercial paper with original
maturities greater than three months but less than six months. The Company has
classified its marketable securities as held-to-maturity as management has the
intent and ability to hold those securities to maturity. Such securities are
recorded at cost, which approximates fair value.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist principally of cash equivalents, marketable securities and
accounts receivable. The Company places its short-term cash investments with
government agencies and high credit-quality financial institutions while
commercial paper investments are placed with high credit-caliber corporate
issuers. The Company limits the amount of credit exposure in any one
institution or type of investment instrument. Credit risk with respect to
accounts receivable is minimized due to the diversification of the Company's
customer base. For all customers with monthly recurring or non-recurring
monthly revenue in excess of $250, and for all DSL customers, credit is
extended based on an evaluation of the customer's financial condition and
generally collateral is not required. The Company maintains allowances for
potential credit losses from such customers.
F-35
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Costs
capitalized in connection with the development of communication networks
include expenses associated with network infrastructure, communications
equipment, construction, capitalized interest and capitalized labor. Labor
costs incurred to construct or make assets ready for their intended use are
capitalized. Interest costs incurred during the period of time that internally
constructed assets are being made ready for their intended use are capitalized
as part of acquiring such assets to the extent that these interest costs
relate to financing obtained in order to prepare such assets for use.
Depreciation of communications networks commences when the applicable network
becomes commercially operational. Certain of the Company's assets are held
under capital leases. Assets held under capital leases are depreciated over
the lesser of the term of the lease or the estimated useful life of the asset.
The estimated useful lives of the Company's principal classes of assets are
as follows:
<TABLE>
<S> <C>
Network infrastructure...... 20 years
Telecommunications
equipment.................. 5-7 years
Building and improvements... 30 years
Furniture, office equipment
and other.................. 3-7 years
Leasehold improvements...... Shorter of estimated useful life or lease term
</TABLE>
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery
of the asset's carrying value unlikely. Potential impairment associated with
network infrastructure costs is measured on the basis of specific network
projects. An impairment loss would be recognized when the sum of the expected
future net cash flows is less than the carrying amount of the asset. Assets to
be disposed of are carried at the lower of their financial statement carrying
amount or fair value less costs to sell.
Debt Discount and Deferred Financing Costs
Discounts recorded in connection with the issuance of debt financing are
deferred and amortized over the term of the related debt using the interest
method. Deferred financing costs include commitment fees and other costs
related to certain debt financing transactions and are being amortized over
the term of the related debt using the interest method.
Revenue Recognition
The Company derives revenue from three primary sources: Internet services,
web integration and consulting services and telephony services.
Internet services revenue is derived from providing DSL services, web
hosting and design, e-commerce solutions, dial-up and dedicated high-speed
Internet access and data center services. Revenue for all Internet services,
other than e-commerce, is recognized as the service is provided. Revenue for
development of e-commerce applications is recognized under the percentage-of-
completion method of accounting based upon the ratio that costs incurred bear
to the total estimated costs for each e-commerce application being developed.
Amounts billed relating to future periods are recorded as deferred revenue and
are recognized in revenue as services are rendered.
F-36
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Web integration and consulting services revenue is derived from network
consulting, design, integration, equipment sales and management services.
Revenue is recognized under the percentage-of-completion method of accounting
based upon the ratio that costs incurred bear to the total estimated cost for
each contract.
Telephony services revenue is generated from local and long distance
telephone services. The Company generates telephony services revenue by
replacing the basic telephony services currently provided by incumbent local
exchange carriers, interexchange carriers and competitive local exchange
carriers, including local, long distance and other telephony services. Revenue
is recognized in the month telephony services are provided. Amounts billed
relating to future periods are recorded as deferred revenue and are recognized
in revenue as services are rendered.
Stock-Based Compensation Accounting
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss as if the minimum value method had been applied in
measuring compensation expense. Compensation charges for non-employee, stock-
based compensation is measured using fair value-based methods.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset or liability is computed
for both the expected future impact of differences between the financial
statement and tax bases of assets and liabilities and for the expected future
tax benefit to be derived from tax loss and tax credit carryforwards.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be "more likely than not" realized in future
tax returns. Tax rate changes are reflected in the statement of operations in
the period such changes are enacted.
Earnings Per Share
The Company calculates net loss per share in accordance with SFAS No. 128,
"Earnings Per Share." In accordance with SFAS No. 128, basic earnings per
share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is determined in the
same manner as basic earnings per share except that the number of shares is
increased assuming exercise of dilutive stock options, purchase rights and
warrants using the treasury stock method and conversion of the Company's
convertible preferred stock using the if-converted method.
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Potential Common Shares Underlying:
Options 151,245 1,423,839
Warrants 25,188,021 25,048,527
---------- ----------
25,339,266 26,472,366
========== ==========
</TABLE>
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosure About Segments of an
Enterprise and Related Information" ("SFAS No. 131"), effective for fiscal
years beginning after December 15, 1997. Under SFAS No. 131, the Company will
be required to present certain information about operating segments, including
profit or loss and segment assets. The Company has not yet determined the
impact of the adoption of this statement.
F-37
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--BUSINESS ACQUISITIONS
Optec
On November 24, 1998, the Company acquired Optec, Inc., doing business as
FirstWorld Northwest, Inc. ("Optec"), a company providing web integration
services to businesses with operations in Oregon and Washington, from Enron
Communications. As part of this acquisition, the Company also acquired rights
to use fiber optic cable in parts of Oregon and rights to OC-3 level capacity
to connect up to 15 cities on a long-haul, nationwide network being developed
by Enron Communications. As consideration for the acquisition, the Company
paid $18.3 million in cash and repaid $4.0 million of Optec's outstanding
debt. The Company assigned values of $11.1 million, $9.2 million and $2.0
million to the long-haul network rights, acquired net assets of Optec and the
fiber optic rights, respectively. The long-haul network rights, included in
goodwill and intangibles in the accompanying consolidated balance sheet, have
not yet been placed into service and therefore the Company is not amortizing
this asset. The Company is amortizing the fiber optic rights on a straight-
line basis over 20 years.
The acquisition of Optec was accounted for under the purchase method of
accounting. The excess of the purchase price over the estimated fair value of
the acquired net assets, which is approximately $5.6 million, was recorded as
goodwill and is being amortized on a straight-line basis over 10 years.
Slip.Net
On January 7, 1999, the Company purchased all of the outstanding capital
stock of Accelerated Information, Inc., the parent company of Slip.Net, Inc.
("Slip.Net"), an Internet service company providing Internet access, web
hosting services, e-commerce solutions and co-location services, primarily in
the San Francisco Bay Area. The purchase price consisted of approximately
$10.5 million in cash and 187,500 shares of the Company's Series B common
stock.
The acquisition was accounted for under the purchase method of accounting.
In order to determine the total consideration paid, the Company assigned a
value, based on a valuation performed by an independent third party, of $3.68
per share to the Series B common stock. This resulted in total consideration
of $11.1 million. The excess of the consideration over the estimated fair
value of the acquired net assets, which is approximately $10.9 million, was
recorded as goodwill and is being amortized on a straight-line basis over
three years.
Sirius
On March 2, 1999, the Company purchased all of the outstanding capital
stock of Sirius Solutions, Inc., d/b/a Sirius Connections ("Sirius"), an
Internet service company providing Internet access, web hosting services, e-
commerce solutions and co-location services, primarily in the San Francisco
Bay Area. The purchase price consisted of approximately $7.5 million in cash
and 285,000 shares of the Company's Series B common stock.
The acquisition was accounted for under the purchase method of accounting.
In order to determine the total consideration paid, the Company assigned a
value, based on a valuation performed by an independent third party, of $4.02
per share to the Series B common stock. This resulted in total consideration
of $8.6 million. The excess of the consideration over the estimated fair value
of the acquired net liabilities, which is approximately $8.6 million, was
recorded as goodwill and is being amortized on a straight-line basis over
three years.
Hypercon
On June 1, 1999, the Company purchased all of the outstanding capital stock
of Hypercon, Inc. ("Hypercon"), an Internet service company providing Internet
access, web hosting services, e-commerce solutions and co-location services,
in the Houston metropolitan area. The purchase price consisted of
approximately $2.0 million in cash and 49,993 shares of the Company's Series B
common stock. Subsequent to the acquisition, the Company repaid approximately
$215,000 in debt.
F-38
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The acquisition was accounted for under the purchase method of accounting.
In order to determine the total consideration paid, the Company assigned a
value, based on a valuation performed by an independent third party, of $6.00
per share to the Series B common stock. This, combined with the assumption of
certain net liabilities of approximately $500,000, resulted in total
consideration of $2.8 million. The excess of the consideration over the
estimated fair value of the acquired net assets, which is approximately $2.8
million, was recorded as goodwill and is being amortized on a straight-line
basis over three years.
Internet Express
On June 14, 1999, the Company purchased all of the outstanding membership
interests of Internet Express, LLC ("Internet Express"), an Internet service
company providing Internet access and web hosting services in the Denver/Front
Range metropolitan area, including Colorado Springs and Fort Collins. The
purchase price consisted of approximately $1.0 million in cash and 30,000
shares of the Company's Series B common stock. Subsequent to the acquisition,
the Company repaid approximately $959,000 in various liabilities.
The acquisition was accounted for under the purchase method of accounting.
In order to determine the total consideration paid, the Company assigned a
value, based on a valuation performed by an independent third party, of $6.00
per share to the Series B common stock. This, combined with the assumption of
certain net liabilities of approximately $1.0 million, resulted in total
consideration of $2.2 million, which was recorded as goodwill and is being
amortized on a straight-line basis over three years.
inQuo
On June 22, 1999, the Company purchased all of the outstanding capital
stock of inQuo, Inc. ("inQuo"), an Internet service company providing
dedicated Internet access in the Salt Lake City metropolitan area. The
purchase price was approximately $844,000 in cash.
The acquisition was accounted for under the purchase method of accounting.
The cash payment combined with the assumption of certain net liabilities of
approximately $150,000, resulted in total consideration of approximately $1.0
million, which was recorded as goodwill and is being amortized on a straight-
line basis over three years.
Transport Logic
On July 7, 1999, the Company acquired all of the outstanding capital stock
of Oregon Professional Services, Inc., d/b/a Transport Logic ("Transport
Logic"), an Internet service company providing Internet access, web hosting
services, e-commerce solutions and co-location services in the western and
northwestern United States. The purchase price consisted of approximately $7.2
million in cash and 392,935 shares of the Company's Series B common stock.
The acquisition was accounted for under the purchase method of accounting.
In order to determine the total consideration paid, the Company assigned a
value, based on a valuation performed by an independent third party, of $6.00
per share to the Series B common stock. This, combined with the assumption of
certain net liabilities of approximately $1.0 million, resulted in total
consideration of $10.5 million, which was recorded as goodwill and is being
amortized on a straight-line basis over three years.
Intelenet
On July 14, 1999, the Company purchased all of the outstanding capital
stock of Intelenet Communications, Inc. ("Intelenet"), an Internet service
company providing advanced connectivity, data center services and networking
consulting in Southern California. The purchase price consisted of
approximately $16.0 million in cash and 875,000 shares of the Company's Series
B common stock.
The acquisition was accounted for under the purchase method of accounting.
In order to determine the total consideration paid, the Company assigned a
value, based on a valuation performed by an independent third party, of $6.00
per share to the Series B common stock. This resulted in total consideration
of $21.3 million. The excess of the consideration less the estimated fair
value of the acquired net assets, which is approximately $20.2 million, was
recorded as goodwill and is being amortized on a straight-line basis over
three years.
F-39
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro Forma Acquisition Information
The following unaudited condensed pro forma information presents the
unaudited results of operations of the Company as if the acquisitions of the
above mentioned companies had occurred on October 1, 1998 (in thousands):
<TABLE>
<CAPTION>
Three months Nine months
ended ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Revenue......................................... $ 12,168 $ 46,112
Net loss........................................ $(24,463) $(80,233)
</TABLE>
The results of operations of the above mentioned companies have been
included in the consolidated financial statements from the date they were
acquired. The above mentioned companies may have performed differently if they
had actually been combined with the Company's operations during these periods.
No reliance should be placed on the unaudited pro forma information as
indicative of the historical results that the Company would have had or the
future results that it will experience after the acquisitions.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment, including assets under capital lease, consists of
the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(in
thousands)
<S> <C> <C>
Network infrastructure............................ $28,000 $ 32,547
Telecommunications equipment...................... 18,480 35,064
Building and improvements......................... 1,092 836
Furniture, office equipment and other............. 6,129 22,670
Leasehold improvements............................ 726 947
Construction in process........................... 11,217 18,859
------- --------
65,644 110,923
Accumulated depreciation.......................... (4,397) (10,098)
------- --------
$61,247 $100,825
======= ========
</TABLE>
The following is a summary of property and equipment acquired under capital
leases, included in the above:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------- -------------
(in thousands)
<S> <C> <C>
Network infrastructure (Note 6)................ $6,000 $ 6,000
Telecommunications equipment................... 219 843
Building and improvements...................... 321 321
Furniture, office equipment and other.......... 470 1,202
------ -------
7,010 8,366
Accumulated depreciation....................... (706) (1,375)
------ -------
$6,304 $6,991
====== =======
</TABLE>
During the three months ended December 31, 1998 and the nine months ended
September 30, 1999, the Company capitalized approximately $333,000 and
$405,000, respectively, in interest costs associated with the development of
the Company's data centers and communications networks. Depreciation expense
was $1.4 million and $6.9 million for the three months ended December 31, 1998
and the nine months ended September 30, 1999, respectively.
F-40
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------- -------------
(in thousands)
<S> <C> <C>
13% Senior Notes, net of unamortized discount
totaling $185.6 million at September 30, 1999
and $212.1 million at December 31, 1998...... $257,919 $284,370
14% unsecured term note with a vendor; monthly
installments of principal and interest
payable through December 2000................ 150 127
9.03% term loan secured by certain assets;
monthly installments of principal and
interest payable through June 2002........... 129 104
Other......................................... 12 101
-------- --------
258,210 284,702
Less current portion.......................... (75) (115)
-------- --------
$258,135 284,587
======== ========
</TABLE>
Listed below are the aggregate principal maturities of long-term debt for
the three months ending December 31, 1999 and each of the years ending
December 31,
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Three months ended December 31, 1999.......................... $ 37
2000.......................................................... 227
2001.......................................................... 46
2002.......................................................... 22
2003.......................................................... --
2004.......................................................... --
Thereafter.................................................... 470,000
---------
470,332
Less unamortized discount on the 13% Senior Notes............. (185,630)
---------
$ 284,702
=========
</TABLE>
Senior Notes
On April 13, 1998, the Company completed an offering of debt securities
pursuant to Rule 144A under the Securities Act of 1933, as amended (the
"Act"), for gross proceeds of $250.2 million (the "Senior Notes Debt
Offering"). In the Senior Notes Debt Offering, the Company sold 470,000 units
consisting of 13% Senior Discount Notes due 2008 (the "Senior Notes") and
warrants to purchase an aggregate of 3,713,094 shares of the Company's Series
B common stock (Note 9). The Company allocated $235.2 million of the proceeds
to the Senior Notes and $15.0 million to the warrants, representing their
estimated fair value at the date of issuance as determined via an independent
valuation.
The Senior Notes will accrete in value through April 15, 2003 at a rate of
13% per annum, compounded semi-annually, at which time $470.0 million in
aggregate principal amount at maturity will be outstanding. Cash interest will
neither accrue nor be payable prior to April 15, 2003. Thereafter, cash
interest on the Senior Notes will accrue and will be payable semi-annually in
arrears on each April 15 and October 15, commencing
F-41
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 15, 2003, at a rate of 13% per annum. The Company is not required to
make mandatory redemption or sinking fund payments with respect to the Senior
Notes prior to maturity. The Senior Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after April 15, 2003, at a
premium declining to par on April 15, 2006, plus accrued and unpaid interest
through the date of redemption. In the event of a change in control, as
defined in the indenture governing the Senior Notes, the holders of the Senior
Notes will have the right to require the Company to purchase their Senior
Notes in an amount equal to 101% of the aggregate principal amount at maturity
or accreted value thereof, as applicable, plus accrued and unpaid interest to
the date of purchase.
The indenture pursuant to which the Senior Notes are issued contains
certain covenants which, among other things, limit the ability of the Company
and its subsidiaries to incur additional indebtedness, issue stock in
subsidiaries, pay dividends or make other distributions, engage in sale and
leaseback transactions, create certain liens, enter into certain transactions
with affiliates, sell assets of the Company and its subsidiaries, and enter
into certain mergers and consolidations. The Company was in compliance with
such covenants at December 31, 1998 and at September 30, 1999.
NOTE 6--COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments
The Company leases its office space, certain network access facilities and
fiber transport and automobiles under noncancelable operating lease
arrangements which expire on varying dates through March 2014. Rent expense
under noncancelable operating leases totaled $393,000 and $2.0 million during
the three months ended December 31, 1998 and the nine months ended September
30, 1999, respectively.
The Company has procured certain of its property and equipment, including
its Anaheim network central office switching facility, through capital leases
that expire through October 2002. Additionally, the Company has accounted for
certain agreements with the City of Anaheim, as more fully described below and
which extend through January 2027, as both capital leases and executory
contracts in the accompanying financial statements.
Listed below are the future minimum payments under capital leases
(inclusive of the minimum payments allocated from the agreements with the City
of Anaheim) and noncancelable operating leases for three months ending
December 31, 1999 and each of the years ending December 31,
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
(in thousands)
<S> <C> <C>
Three months ending December 31, 1999.................... $ 596 $ 1,138
2000..................................................... 2,136 3,930
2001..................................................... 1,633 3,949
2002..................................................... 1,356 3,291
2003..................................................... 1,346 2,163
2004..................................................... 1,349 1,851
Thereafter............................................... 28,556 7,850
-------- -------
Total minimum lease payments............................. 36,972 $24,172
-------- =======
Amount representing interest............................. (28,634)
--------
Present value of minimum lease payments.................. $ 8,338
========
</TABLE>
F-42
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments Relating to Agreements with the City of Anaheim
During February 1997, the Company and its wholly owned subsidiary
FirstWorld Anaheim ("FWA") entered into a 30-year Universal Telecommunications
System Participation Agreement (as amended, the "UTS Agreement") with the City
of Anaheim, California (the "City"), under which FWA has agreed to design,
construct and operate a fiber-optic telecommunications network in cooperation
with the City. The UTS Agreement provides for FWA to pay to the City (i) an
annual payment in lieu of a franchise fee based on a percentage of FWA's
"adjusted gross revenues," as defined, related to the Anaheim network, subject
to a minimum annual payment of $1.0 million for periods after June 30, 1999
through the term of the agreement; (ii) a percentage of FWA's "net revenues,"
as defined, derived from the Anaheim network; (iii) certain of the City's
annual operating costs associated with the UTS Agreement, not to exceed
$175,000 per year prior to the commencement of the third phase of the Anaheim
network (as described below), and not to exceed $350,000 per year thereafter,
subject to inflationary adjustments; and (iv) $20,000 per year to support the
City's presence on the Internet, subject to inflationary adjustments. The UTS
Agreement also requires the Company to deposit an amount equal to up to 15% of
"net revenues" derived from the Anaheim network, as defined, to fund and
maintain a $6.0 million reserve account for debt service and capital
improvements. As of September 30, 1999, no amounts have been deposited into
such reserve account, as "net revenues" have not yet been generated from the
Anaheim network. Pursuant to the UTS Agreement, the City has been granted an
irrevocable option to purchase all of the issued and outstanding stock of FWA
at anytime after July 1, 2012 for its then current appraised fair value, the
determination of which is to be derived by qualified independent appraisers
selected by both the Company and the City, as more specifically defined within
the UTS Agreement. Any sale or issuance of FWA stock can only be made if such
sale or issuance is expressly made subject to the City's purchase option.
Moreover, any sale of the Anaheim network or other sale of substantially all
of FWA's assets can only be made if the City is equitably compensated for the
loss of its future income stream under the UTS Agreement or the buyer
expressly assumes the obligations of FWA under the UTS Agreement.
Simultaneous to the execution of the UTS Agreement, FWA entered into a 30-
year Agreement for Use of Operating Property (the "Operating Property
Agreement") with the City under which FWA has been granted the exclusive right
to lease 60 of 96 fiber strands contained in an approximate 50 mile loop of
fiber optic cable owned by the City, together with related facilities and
rights. Under the terms of the Operating Property Agreement, the Company is
obligated to make quarterly payments to the City of approximately $114,000. In
addition, the Company is obligated to pay its pro rata share (62.5%) of the
costs associated with operating and maintaining the leased property, including
maintenance expenses, taxes, insurance premiums and pole usage fees. FWA has
the right to assign its rights under the Operating Property Agreement, but
will not be released from liability unless the City expressly consents. FWA
also has the right to encumber its interest in the leased property.
F-43
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Although the Company considers the Operating Property Agreement to be a
capital lease and the UTS Agreement to be an executory contract, certain of
the minimum payments prescribed by the UTS Agreement have been accounted for
as additional minimum capital lease payments. The Operating Property Agreement
and the UTS Agreement were bid, negotiated and consummated simultaneously with
each other. In addition, both agreements have identical 30-year terms and
include certain cross-default provisions. Moreover, the Operating Property
Agreement contains payment terms which are below the fair value of the
benefits conferred by such agreement; whereas, the UTS Agreement contains
payment terms which are above the fair value of the benefits conferred by such
agreement. Accordingly, the Company has allocated the collective payments
prescribed by the agreements between the two contracts based upon the
estimated fair value of the benefits the Company receives under each of the
two agreements. Future minimum payments prescribed by the UTS Agreement and
not allocated to the capital lease are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Three months ended December 31, 1999.......................... $ 93
2000.......................................................... 373
2001.......................................................... 373
2002.......................................................... 373
2003.......................................................... 373
2004.......................................................... 373
Thereafter.................................................... 8,491
-------
$10,449
=======
</TABLE>
The UTS Agreement also sets forth requirements for the completion of
network design and the commencement of network construction related to certain
phases of the citywide network. The first phase, which extended service to
identified municipal facilities, was substantially completed in October 1997.
The second phase extended the network to allow service to be provided within
six months following execution of a customer service agreement to commercial,
industrial and governmental customers within certain defined service areas. It
is the Company's position that the second phase was substantially completed by
December 1998. The City has initially rejected the Company's position
regarding completion of the second phase and is conducting an independent
analysis of the completion. In the event that FWA does not meet the specified
performance deadlines related to completion of the first and second phases of
the Anaheim network, the City may elect to either terminate the Operating
Property Agreement if FWA agrees to return the leased fiber, or to immediately
exercise its option to purchase all of the issued and outstanding stock of FWA
under the same option terms, as defined within the UTS Agreement, which
otherwise do not become effective until after July 1, 2012. Any termination of
the Operating Property Agreement would have a material adverse effect on the
Company's business, financial condition and results of operations.
Under the UTS Agreement, the third phase of the Anaheim network, would
allow service to be extended, within six months of a customer service
agreement, to all customers within the city, including residential customers.
The third phase will be commenced only after a feasibility study for the third
phase, prepared by an independent consultant, validates the business plan for
the third phase and financing is arranged. FWA has agreed to cause a
feasibility study with respect to the third phase to be completed no later
than January 1, 2000, and thereafter to provide annual updates to the study if
necessary. The City has approved the consultant selected by the Company to
prepare the feasibility study. The delivery of the study may occur after
January 1, 2000. The contract provides for 180 days to cure any potential
default. The Company believes it could cure any potential default within the
applicable cure period. If the Company determines not to proceed with the
development of the third phase of the Anaheim network, or if for any reason
the principal financing for the third phase is not funded or construction of
the third phase is not commenced by December 31, 2002, then the City may
pursue development of the third phase on its own.
F-44
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company commenced operation of a demonstration center in the City's
downtown area in May 1999. Although the Company believes it is in compliance
with its obligations with respect to the demonstration center, the City has
asserted its belief that the Company is not satisfying such obligations. The
Company does not believe that the ultimate resolution of any dispute regarding
the demonstration center will have a material adverse effect on the Company's
results of operations, liquidity or financial position.
Pursuant to a Development Fee Arrangement dated simultaneous to the
aforementioned City agreements, for a period of five years, commencing with
the earlier to occur of the closing of the financing for or the commencement
of construction of the first Additional Network (as defined below), the
Company must pay to the City a lump sum development fee for each Additional
Network which the Company develops ($300,000 for each Additional Network
financed in the first year; $200,000 for each Additional Network financed in
the second year; and $100,000 for each Additional Network financed in the
third, fourth and fifth years, which amounts must be paid within thirty days
following the closing of the principal financing for an Additional Network or
the commencement of construction of such Additional Network, whichever occurs
first). "Additional Network" means (a) any expansion of the Anaheim network
into one or more adjacent or nearby cities where FWA enters into a revenue
sharing agreement with any such city, and (b) any separate communications
system developed by any other subsidiary of the Company that holds a
Certificate of Public Convenience and Necessity issued by the Public Utilities
Commission and enters into a revenue sharing agreement with one or more public
entities. See Note 12--Legal Proceedings for a discussion of the legal
proceeding between the City and FWA and the Company.
Commitments Relating to Agreements with the Irvine Company
On March 5, 1998, FirstWorld Orange Coast ("FWOC"), a wholly-owned
subsidiary of the Company, and The Irvine Company entered into two agreements
regarding FWOC's development of a network to serve certain areas that have
been or are planned to be developed by The Irvine Company (the "Irvine
Network"). The Company has guaranteed the payment obligations of FWOC under
each of such agreements.
Pursuant to an Agreement for Lease of Telecommunications Conduit dated as
of March 5, 1998 (the "Conduit Lease"), FWOC leases from The Irvine Company
space within two underground telecommunications tubes (the "Conduit"), and, in
connection therewith, has received the non-exclusive right to use undivided
space within the pull boxes serving such Conduit (collectively, the "Leased
Premises"). The Conduit Lease applies to (i) an existing Conduit system within
certain already-developed areas in the Irvine Spectrum and (ii) Conduit to be
constructed in the future in the as yet undeveloped areas of the Irvine
Spectrum. The Irvine Company may also install Conduit in other areas it may
develop in the cities of Irvine, Newport Beach and Tustin, and in
unincorporated areas of Orange County, and such areas may in the future be
incorporated into the Conduit Lease upon the mutual agreement of the parties
(the "Additional Areas"). The term of the Conduit Lease runs through December
31, 2027.
The Conduit Lease obligates FWOC to install fiber optic cable (the "Cable")
in the Conduit pursuant to a phasing plan. A phase is completed when
sufficient Cable has been installed to enable FWOC to connect and provide
service (for that portion of the Irvine Network) to property abutting the
Conduit. Upon termination of the agreement, The Irvine Company will own the
Cable. If FWOC fails to complete installation of the required Cable within 18
months following March 5, 1998, The Irvine Company may, until such
installation is completed, terminate the Conduit Lease. The Company is
currently verifying the completion of the required installation.
The Conduit Lease obligates FWOC to make quarterly rent payments to The
Irvine Company based upon its "adjusted gross revenue", as defined, from the
Irvine Network. In addition, FWOC is obligated to pay all costs associated
with its lease, operation, maintenance, repair and use of the Leased Premises,
including maintenance expenses, taxes and insurance premiums. Any assignment
of FWOC's rights under the Conduit Lease and any sale of a controlling
interest in FWOC require The Irvine Company's prior approval, and The Irvine
Company has a right of first refusal in the event of any such proposed sale.
F-45
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Based upon its term, the Conduit Lease is a capital lease. However, as such
lease does not prescribe any fixed rental payments and as it is not
practicable for the Company to estimate any future probable contingent rental
payments associated with such lease, no amount has been capitalized in the
accompanying consolidated financial statements. Contingent rental payments
associated with this lease are recorded as additional operating expenditures
when they become due pursuant to the lease.
Concurrently with the execution of the Conduit Lease, FWOC and The Irvine
Company executed a Telecommunications System License Agreement (the "License
Agreement") which provides FWOC, with some exceptions, with the right and
obligation to provide telecommunications services to (i) the 106 buildings
currently owned by The Irvine Company in the Irvine Spectrum area, (ii)
commercial, industrial and retail buildings in the future owned by The Irvine
Company in the Irvine Spectrum, and (iii) under certain circumstances in The
Irvine Company's discretion, similar buildings located in the Additional Areas
and other locations in California.
The License Agreement requires FWOC to pay The Irvine Company a license fee
each calendar quarter, subject to an annual consumer price index ("CPI")
increase that will not be less than 2% or greater than 6%. The base license
fee was initially $62,500 for the buildings owned by Irvine in the Irvine
Spectrum area at the time that the License Agreement was consummated. Pursuant
to the License Agreement, such fee is increased or decreased over its term
based on the rentable square footage of the buildings that are from time to
time subject to the License Agreement. As of September 30, 1999, such fee
totaled approximately $103,000 per calendar quarter. Future minimum payments
prescribed by the License Agreement, based upon this current fee and assuming
a 2% per annum upward CPI adjustment over its term, are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Three months ended December 31, 1999.......................... $ 103
2000.......................................................... 420
2001.......................................................... 429
2002.......................................................... 437
2003.......................................................... 446
2004.......................................................... 455
Thereafter.................................................... 13,383
-------
$15,673
=======
</TABLE>
The License Agreement provides FWOC with the right to install, maintain,
operate, replace and remove Cable and associated communications equipment (the
"Equipment") in, as well as access rights to, such buildings, subject to the
rights of The Irvine Company's tenants and to reasonable requirements and
procedures imposed by The Irvine Company. Except with respect to buildings
that are leased to a single tenant, The Irvine Company is required to provide
FWOC with a reasonable amount of equipment room space in each building,
sufficient to enable FWOC to install Cable and Equipment and deliver services.
FWOC's rights to a building are non-exclusive, meaning that The Irvine Company
can grant similar licenses to other service providers. Although all the Cable
becomes the property of The Irvine Company upon termination of the License
Agreement, FWOC has the right to remove and retain ownership of the Equipment,
subject to The Irvine Company's election to purchase the Equipment at a price
to be negotiated by the parties.
Subject to certain qualifications, FWOC will have the obligation to provide
telecommunications services to any tenant who wishes to subscribe with FWOC
for those services, and FWOC is required to install Cable and Equipment in
that tenant's building if FWOC owns or leases Conduit located within 1,000
feet of that building. Under certain circumstances, FWOC may be required to
provide completion and performance bonds to The Irvine Company in connection
with that work. To the extent that FWOC provides fiber optic service to a
building, it is required to achieve and maintain standards of minimum
reliability. Subject to force majeure, if
F-46
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
there is a system-wide failure to provide such service that exceeds five
consecutive days, The Irvine Company has the right to use the network (and if
necessary bring in an alternative service provider) and to charge its costs to
FWOC.
Whenever FWOC is the first competitive access provider to a building, it is
required to install a building entrance conduit system (which connects the
building to the street access point) (a "BECS"), with a capacity equal to 200%
of the capacity required by FWOC to service the building. The Irvine Company
can grant other providers the right to use that BECS, but must pay or cause
that provider to pay FWOC 50% of FWOC's cost of installing the BECS, which
costs are subject to increase based on a CPI calculation. Where a BECS already
exists, The Irvine Company must make any excess capacity therein available to
FWOC.
Other Commitments
The Company is party to a contract with a long distance carrier pursuant to
which the Company is committed to minimum service fees. Such minimum fees
aggregate $1.8 million, $9.9 million, $16.2 million and $12.4 million during
the three months ending December 31, 1999, and the years ending December 31,
2000, 2001 and 2002, respectively.
The Company entered into separate management consulting service agreements
with two significant shareholders (or affiliates thereof) whereby such parties
will provide general management consulting services to the Company for a
period of three years commencing January 1, 1998. Pursuant to such agreements,
as amended, the Company is required to pay to the related parties aggregate
consulting fees totaling $500,000 per annum. Related party consulting fees
recorded by the Company during the nine months ended September 30, 1999
totaled $750,000. Future minimum consulting fees under these agreements
aggregate $250,000 for the three months ending December 31, 1999 and $1.0
million for year 2000.
The Company is party to an arrangement with the owner of a retail
development located in Orange County, California, whereby it is required to
remit to the owner of such development a percentage of "adjusted gross
revenues", as defined, derived from serving tenant customers located within
such development.
NOTE 7--FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments have been
determined by the Company using available market information and valuation
methodologies. Considerable judgment is required to develop the estimates of
fair value; thus the estimates provided herein are not necessarily indicative
of the amount that the Company could realize upon the sale or refinancing of
such financial instruments. Carrying value for cash and cash equivalents,
marketable securities, accounts receivable and accounts payable approximates
fair value due to their short-term nature. At September 30, 1999, the fair
value and the carrying value of the long-term debt, net of discount, on the
consolidated balance sheet was approximately $273 million and $285 million,
respectively. The fair value of the long-term debt represents the amount at
which the instrument could be exchanged in a current arms-length transaction.
NOTE 8--CEO EMPLOYMENT AGREEMENT
On September 28, 1998, the Company entered into an Employment Agreement, as
amended May 20, 1999, (the "Employment Agreement") pursuant to which the
Company retained the services of a new President and Chief Executive Officer
(the "CEO") effective October 1, 1998 (the "Commencement Date"). The
Employment Agreement has a three-year term ending on the close of business on
September 30, 2001, and thereafter will renew for one year periods unless
terminated earlier by either party, and provides an initial annual base salary
of $200,000 per annum. Additionally, the Employment Agreement granted the CEO
an Equalization Payment (as defined within the Employment Agreement) in the
amount of $4.0 million, payable in three separate installments.
F-47
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The first $2.0 million installment and the second $1.0 million installment
became due and were paid on October 1, 1998 and October 1, 1999, respectively,
while the third $1.0 million installment is due and payable on October 1,
2000. The CEO must be employed by the Company on the date that the third
installment becomes due to be eligible to receive the payment unless the
Company terminates the CEO's employment other than for cause or the CEO
terminates his own employment for good reason (as defined in the Employment
Agreement) prior to the installment date. In addition, the CEO may elect to
receive all or any portion of the third installment payment in the form of the
Company's Series B common stock. If the CEO elects to receive any of the third
installment payment in Series B common stock, such stock shall be valued at
$7.50 per share.
The Employment Agreement stipulates that the CEO will also be eligible for
the following performance-based bonuses: (i) if the Company consummates a
Qualified Initial Public Offering (as defined in the Employment Agreement)
with a price of at least $10.00 per share (subject to adjustment as set forth
in the Employment Agreement) within the first 18 months after the Commencement
Date, the Company will pay the CEO a $1.0 million cash bonus; (ii) if the
Company consummates a Qualified Initial Public Offering with a price of at
least $10.00 per share (subject to adjustment as set forth in the Employment
Agreement) within the first 18 months after the Commencement Date, the Company
will be obligated to pay the CEO a $4.2 million cash bonus on September 30,
2001 (unless otherwise accelerated as described in the Employment Agreement);
(iii) if the Company consummates a Qualified Initial Public Offering with a
price of at least $12.50 per share (subject to adjustment as set forth in the
Employment Agreement) within the first 24 months after the Commencement Date,
the Company will be obligated to pay the CEO an $8.4 million cash bonus on
September 30, 2001 (unless otherwise accelerated as described in the
Employment Agreement); provided that if the CEO earns the payment described in
this clause (iii) he will not be entitled to receive the payment described in
clause (ii) above; and (iv) if the Company has a market capitalization of at
least $1.2 billion (as adjusted as described in the Employment Agreement) for
a period of 20 consecutive trading days during a three-year period beginning
on the Commencement Date, the Company will be obligated to pay the CEO a cash
payment equal to $16.8 million minus any amounts he receives pursuant to
clause (ii) or (iii) above on September 30, 2001 (unless otherwise accelerated
as described in the Employment Agreement).
The Employment Agreement also granted the CEO on October 1, 1998 an option
to purchase 2,805,000 shares of Series B common stock at an exercise price of
$6.00 per share (subject to anti-dilution protections set forth in the
Employment Agreement). The option vests (i) with respect to 1/3 of the shares
covered by the option on the Commencement Date, (ii) with respect to 1/3 of
the shares covered by the option on the first anniversary of the Commencement
Date and (iii) with respect to the remaining 1/3 of the shares covered by the
option on the second anniversary of the Commencement Date (unless otherwise
accelerated in accordance with the terms of the Employment Agreement).
NOTE 9 --WARRANTS
At September 30, 1999 and December 31, 1998, the following non-employee
warrants were outstanding:
In connection with the Senior Notes Debt Offering, which was consummated on
April 13, 1998, the Company issued to the initial purchasers of the Senior
Notes warrants to purchase 3,713,094 shares of Series B common stock at an
exercise price of $0.01 per share. Such warrants are currently exercisable and
expire on April 15, 2008. Such warrants contain customary adjustments to
protect against dilution, as well as certain additional anti-dilutive
adjustments as defined in the warrant agreement. As of December 31, 1998 and
September 30, 1999, all of these warrants remain outstanding.
In connection with the April 13, 1998 private placement of Series B common
stock, the Company issued warrants for the purchase of 6,666,666 shares of
Series B common stock to the investors therein. Such warrants
F-48
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
were issued with an exercise price of $3.00 per share, contain customary
adjustments to protect against dilution, and may be exercised at any time
prior to the first to occur of (i) April 13, 2005; (ii) the merger of the
Company with or into another entity in which the shareholders of the Company
immediately prior to the merger own less than 50% of the voting securities of
the surviving entity immediately following the merger; and (iii) the sale by
the Company of all or substantially all of its assets. As of December 31, 1998
and September 30, 1999, all of these warrants remain outstanding.
In connection with the December 30, 1997 private placement of Series A
common stock, the Company issued warrants for the purchase of 10,135,164
shares of Series B common stock to the investors therein. Such warrants were
issued with an exercise price of $3.00 per share, contain customary
adjustments to protect against dilution, and may be exercised at any time
prior to the first to occur of (i) December 30, 2004; (ii) the merger of the
Company with or into another entity in which the shareholders of the Company
immediately prior to the merger own less than 50% of the voting securities of
the surviving entity immediately following the merger; and (iii) the sale by
the Company of all or substantially all of its assets. As of December 31, 1998
and September 30, 1999, all of these warrants remain outstanding.
In connection with the private placement of Series A common stock referred
to above, the Company also issued to certain financial advisors warrants to
purchase 17,500 and 30,000 shares of Series B common stock at exercise prices
of $6.00 and $5.00, respectively, all of which have terms of five years and
contain customary adjustments to protect against dilution. As of September 30,
1999, all of these warrants remain outstanding.
During January 1997, the Company issued to a lender warrants to purchase
800,000 shares of common stock. Such warrants were issued with an exercise
price of $6.00 per share, a term of five years, and contain customary
adjustments to protect against dilution, as well as certain additional anti-
dilutive adjustments as defined in the warrant agreement. As a result of the
capital transaction and the equity recapitalization which occurred on December
30, 1997, these warrants are currently exercisable into 800,000 shares of
Series B common stock at an exercise price of $3.00 per share. As of December
31, 1998 and September 30, 1999, all of these warrants remain outstanding.
During January 1997, the Company issued warrants to purchase 83,400 shares
of common stock to certain financial advisors, which warrants have an exercise
price of $6.00 and a term of five years. As a result of the equity
recapitalization which occurred on December 30, 1997, these warrants are
currently exercisable into shares of Series B common stock. As of December 31,
1998 and September 30, 1999, all of these warrants remain outstanding.
During August 1997, the Company issued a lender warrants to purchase
300,000 shares of common stock. Such warrants were issued with an exercise
price of $6.00 per share, a term of seven years, and contain customary
adjustments to protect against dilution, as well as certain additional anti-
dilutive adjustments as defined in the warrant agreements. As a result of the
capital transaction and the equity recapitalization which occurred on December
30, 1997 and the capital transaction occurring on April 13, 1998, such
warrants are currently exercisable into 470,092 shares of Series B common
stock at an exercise price of $3.83 per share. As of December 31, 1998 and
September 30, 1999, all of these warrants remain outstanding.
During July 1997, warrants to purchase 33,789 shares of common stock were
issued to the note holders. Such warrants, which expire in July 2002, have an
exercise price of $6.00 per share and contain customary adjustments to protect
against dilution. As a result of the equity recapitalization which occurred on
December 30, 1997, these warrants are currently exercisable into shares of
Series B common stock. As of December 31, 1998 and September 30, 1999, all of
these warrants remain outstanding.
During January 1997, the Company issued to certain legal service providers
warrants to purchase 19,000 and 5,000 shares of common stock at exercise
prices of $.50 and $5.00, respectively. Such warrants have terms
F-49
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of five years and contain customary adjustments to protect against dilution.
As a result of the equity recapitalization which occurred on December 30,
1997, these warrants are currently exercisable into shares of Series B common
stock. As of December 31, 1998 and September 30, 1999, all of these warrants
remain outstanding.
During January 1997, the Company issued a warrant for the purchase of
800,000 shares of common stock to the Sturm Entities for cash proceeds
totaling $200,000, which warrant has a term of five years. As issued, the
original warrant agreement contained a complex anti-dilution provision
pursuant to which the number of underlying common shares and exercise price
per common share would have been adjusted based upon the occurrence of certain
future events, as defined in the warrant agreement. On December 30, 1997, the
warrant agreement was amended whereby the number of shares purchasable under
the warrant was set at 2,110,140 shares of Series B common stock with an
exercise price of $1.80 per share. This warrant, as amended, remains subject
to certain customary adjustments to protect against dilution. As of December
31, 1998 and September 30, 1999, no shares have been issued pursuant to this
warrant.
In connection with a private placement of Series C preferred stock in
January 1997, the Company issued warrants for the purchase of 520,000 shares
of common stock to the investors. Such warrants were issued with an exercise
price of $5.00 per share, a term of five years, and contain customary
adjustments to protect against dilution, as well as certain additional anti-
dilutive adjustments as defined in the warrant agreements. As a result of the
capital transactions which occurred on December 30, 1997 and April 13, 1998,
such warrants are currently exercisable into 736,564 shares of Series B common
stock at an exercise price of $3.53 per share. As of December 31, 1998 and
September 30, 1999, all of these warrants remain outstanding.
In connection with the private placement of Series C preferred stock
referred to above, during January 1997 the Company also issued to certain
financial advisors warrants to purchase 218,118 and 15,000 shares of common
stock at exercise prices of $5.00 and $.50, respectively, all of which have
terms of five years and contain customary adjustments to protect against
dilution. During March 1997, 5,000 of the $.50 warrants were exercised for
proceeds totaling $2,500. As a result of the equity recapitalization which
occurred on December 30, 1997, the remaining outstanding warrants are
currently exercisable into shares of Series B common stock. As of December 31,
1998 and September 30, 1999, all of the remaining warrants remain outstanding.
As a result of the equity recapitalization which occurred on December 30,
1997, outstanding warrants to purchase 139,494 shares of Series B preferred
stock, 122,828 and 16,666 warrants issued during April 1994 and July 1994,
respectively, have been exercised into shares of Series B common stock. During
the nine months ended September 30, 1999, 109,495 shares of Series B Common
Stock were issued pursuant to warrants exercised for total proceeds of
$152,000 and 29,999 warrants expired.
The fair value of the above-referenced warrants was determined at their
time of grant via application of the Black-Scholes option pricing model, with
respect to those warrants issued in connection with the Senior Notes Debt
Offering, based on an independent valuation.
The following table summarizes information about warrants outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
Outstanding and Exercisable
---------------------------------------------------------
Weighted-Average
Range of Number as of Remaining Contractual Weighted-Average
Exercise Prices September 30, 1999 Life (years) Exercise Price
--------------- ------------------ --------------------- ----------------
<S> <C> <C> <C>
$ .01 3,713,094 8.6 $ .01
$ .50 29,000 2.3 $ .50
$ 1.80 2,110,140 2.3 $1.80
$3.00-3.83 18,808,486 5.1 $3.04
$5.00-6.00 387,807 2.7 $5.35
----------
25,048,527 $2.52
==========
</TABLE>
F-50
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--EMPLOYEE BENEFIT PLANS
The Bonus Program
The Quarterly Bonus Program of the Company (the "Bonus Program") was
adopted by the Board on May 3, 1999, and also approved by the Company's
stockholders at the Company's 1999 Annual Meeting of Stockholders held on June
3, 1999. The Bonus Program is intended to incentivize both individual
productivity and employee retention. A bonus paid out to each eligible
employee in the Bonus Program is based in part on the productivity of that
participant's profit and loss center and in part on that participant's
individual performance. Certain executive officers may elect to receive
shares, in lieu of a cash bonus payment under the Bonus Program. An aggregate
of 200,000 Shares will be available for issuance under the Bonus Program. As
of September 30, 1999, the Company has issued 8,294 shares associated with the
Bonus Program. The Company incurred expenses related to the Bonus Program of
approximately $1.6 million for the nine months ended September 30, 1999.
1999 Equity Incentive Plan
The 1999 Equity Incentive Plan (the "Incentive Plan") was adopted by the
Board on March 8, 1999, and approved by the Company's stockholders at the
Company's 1999 Annual Meeting of Stockholders held on June 3, 1999. The
principal purposes of the Incentive Plan are to provide incentives for key
employees and consultants of the Company through granting of options and stock
appreciation rights ("SARs"). Unless the Board determines otherwise, payment
upon the exercise of any options or stock appreciation rights must be made in
cash at the time of exercise. Options granted under the plan are non-
transferable and expire 90 days after an employee or consultant relationship
with the company is terminated. Options generally vest over a period of not
more than 4 years, and expire 5 or 7 years after the grant date, based on
compliance with certain securities laws. As of September 30, 1999, options
covering an aggregate of 3,115,550 shares of the Company's Series B Common
Stock, at exercise prices ranging from $6.00 to $7.50, were outstanding under
the Incentive Plan. Included in the 3,115,550 options as of September 30,
1999, were outstanding stock appreciation rights covering an aggregate of
632,700 shares of the Company's Series B Common Stock and 1,884,450 shares
remained available for future grant under the Incentive Plan. The Incentive
Plan terminates automatically on March 8, 2004, unless terminated sooner. The
aggregate number of shares of Series B Common Stock of the Company or the
equivalent in other equity securities that may be issued upon exercise of
options may not exceed 5,000,000.
1999 Employee Stock Purchase Plan
In December 1999 the board adopted the 1999 Employee Stock Purchase Plan
covering an aggregate of 1,000,000 shares of common stock. The 1999 Employee
Stock Purchase Plan is intended to qualify as an "employee stock purchase
plan" within the meaning of Section 423 of the Internal Revenue Code. Under
the 1999 Employee Stock Purchase Plan, the board may authorize participation
by eligible employees, including officers, in periodic offerings following the
adoption of the 1999 Employee Stock Purchase Plan. The 1999 Employee Stock
Purchase Plan is administered by the board or a committee authorized by the
board to act on its behalf. The 1999 Employee Stock Purchase Plan will
terminate at the direction of the board or when all of the shares reserved for
issuance have been purchased.
1998 Stock Purchase Plan
Under the Company's 1998 Stock Purchase Plan (the "Stock Purchase Plan")
the Company is authorized to issue rights to purchase up to 500,000 shares of
its Series B common stock to employees. Administration of the Stock Purchase
Plan has been delegated to the compensation committee of the Board, subject to
certain limitations. That committee may determine to whom purchase rights are
to be granted, the number of such rights to be granted, the price per share of
the purchase rights and the time limit for exercise of the purchase rights.
F-51
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Shares granted under the Stock Purchase Plan may be purchased using a
promissory note for up to 50% of the purchase price of the stock. If the
purchaser elects to use a promissory note as any part of the purchase price,
the shares purchased must be pledged to secure that note. Unless the
compensation committee determines otherwise, shares purchased through the
Stock Purchase Plan shall be subject to a right of repurchase on behalf of the
Company. The right of repurchase must lapse not more slowly than 20% per year.
In September 1998, the Company offered rights to purchase an aggregate of
300,000 shares of Series B Common Stock to 17 employees. Prior to the stated
expiration of the stock purchase rights in November 1998, five employees
purchased 42,250 shares of Series B Common Stock at a price of $4.50 per
share. No stock purchase rights have been granted under the Stock Purchase
Plan since September 1998. The Stock Purchase Plan terminates automatically on
September 18, 2008 unless it is terminated sooner.
1997 Stock Option Plan
Under the SpectraNet International 1997 Stock Plan the Company is
authorized to issue an aggregate of 1,500,000 options to purchase Series B
Common Stock. The 1997 Stock Option Plan provides for the grants of incentive
stock options ("ISOs") and nonqualified stock options and the award of stock
purchase rights. Subject to the terms and conditions of the 1997 Stock Option
Plan and applicable law, the Board or a duly appointed committee of the Board
has the authority to determine, among other things, which employees, directors
or consultants should be awarded options, the type of options to be awarded,
the number of shares covered by option awards, the exercise price applicable
to options awarded and the vesting schedule of such options. Options awarded
under the 1997 Stock Option Plan are nontransferable and generally expire ten
years from the date of grant. Unless otherwise indicated in the applicable
stock option agreement, the vested portion of options awarded pursuant to the
1997 Stock Option Plan generally remain exercisable for three months after the
termination of the optionee's service with the Company. However, if the
optionee's service with the Company ends because of death or disability,
unless otherwise indicated in the Stock Option Agreement, the optionee has 12
months to exercise the vested portion of his or her options. As of September
30, 1999, options to purchase an aggregate of 720,647 shares of Series B
Common Stock at exercise prices ranging from $3.00 to $6.00 were outstanding
under the 1997 Stock Option Plan.
1995 Stock Option Plan
Under the SpectraNet International 1995 Incentive Stock Option Plan the
Company is authorized to issue ISOs to acquire up to an aggregate of 1,500,000
shares of Series B Common Stock. Subject to the limitations set forth in the
1995 Stock Option Plan, the Board or a committee thereof comprised of at least
three directors has the authority, subject to certain limitations, to select
the employees of the Company to whom grants are made, to designate the number
of shares to be covered by each option, to establish vesting schedules, and to
specify other terms of the options. Generally, options vest over a four and
one half-year period and expire ten years from the date of grant. Options
granted under the 1995 Stock Option Plan are nontransferable and expire 90
days after the termination of an optionee's employment with the Company,
unless such optionee's service with the Company is terminated by death or
disability, in which case the options expire six months and one year,
respectively, after the optionee's employment with the Company is terminated.
As of September 30, 1999, options to purchase an aggregate of 66,800 shares of
Series B Common Stock at prices ranging from $.25 to 4.50 were outstanding
under the 1995 Stock Option Plan.
F-52
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option, stock appreciation rights, and stock purchase right
transactions during the three months ended December 31, 1998 and the nine
months ended September 30, 1999, all of which relate to employee transactions,
are summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted Stock Weighted
Average Stock Average Appre- Average
Stock Exercise Purchase Exercise ciation Exercise
Options Price Rights Price Rights Price
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at October
1, 1998................ 2,033,195 $2.66 300,000 $4.50 -- --
Granted............... 3,173,275 $5.96 -- -- 168,550 $6.75
Exercised............. (166,000) $0.20 (42,250) $4.50 -- --
Canceled.............. (268,017) $3.82 (257,750) $4.50 -- --
--------- ----- -------- ----- -------- -----
Outstanding at December
31, 1998............... 4,772,453 $4.88 -- -- 168,550 $6.75
Granted............... 2,346,350 $6.93 -- -- 572,000 $7.22
Exercised............. (508,209) $1.76 -- -- -- --
Canceled.............. (535,297) $3.91 -- -- (107,850) $6.75
--------- ----- -------- ----- -------- -----
Outstanding at September
30, 1999............... 6,075,297 $6.06 -- -- 632,700 $7.17
========= ===== ======== ===== ======== =====
</TABLE>
The following table summarizes information about stock options and stock
appreciation rights outstanding as of September 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------- -----------------------
Weighted-
Average
Number Remaining Weighted- Weighted-
Range of as of Contractual Average Number as of Average
Exercise September 30, Life Exercise September 30, Exercise
Prices 1999 (years) Price 1999 Price
-------- ------------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$.25 2,000 6.2 $ .25 2,000 $ .25
$.50 36,500 4.4 $ .50 20,800 $ .50
$3.00 365,562 5.9 $3.00 304,587 $3.00
$4.50 378,385 7.6 $4.50 120,005 $4.50
$6.00-7.50 5,925,550 6.3 $6.51 935,125 $6.00
--------- ---------
6,707,997 6.3 $6.17 1,382,517 $5.12
========= =========
</TABLE>
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss as if the minimum value method had been applied in
measuring compensation expense. Had compensation cost for the Company's stock-
based compensation plans been determined based on the minimum value method at
the grant dates for awards under this plan consistent with the method
prescribed by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation", the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, 1998 September 30, 1999
------------------ ------------------
(in thousands)
<S> <C> <C>
Net loss:
As reported.......................... $17,731 $72,389
Pro forma............................ $17,764 $72,679
Earnings per share:
As reported.......................... 0.68 2.64
Pro forma............................ 0.68 2.65
</TABLE>
The minimum value of each option and stock purchase right grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants during
F-53
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the three months ended December 31, 1998 and the nine months ended September
30, 1999: dividend yield of 0.0% for all periods; volatility of 0.0% for all
periods; risk-free interest rates of 4.53% and 5.28% respectively; and an
expected life of 5.0 years for all periods, except with respect to stock
purchase rights granted during the twelve months ended September 30, 1998,
which rights have a term of 10 years. The weighted average fair value of
options and stock purchase rights granted during the three month period ended
December 31, 1998 and the nine month period ending September 30, 1999 was
approximately $4.94 and ,$6.17 respectively.
NOTE 11--INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(in thousands)
<S> <C> <C>
Current:
Accrued liabilities............................. $ 481 $ 644
Non-current:
Net operating loss carryforwards................ 15,251 31,612
Interest deductible when paid................... 7,788 16,873
Depreciation and amortization................... (2,236) (5,305)
-------- --------
21,284 43,824
Valuation allowance............................. (21,284) (43,824)
-------- --------
Deferred tax assets (liabilities), net.......... $ -- $ --
======== ========
</TABLE>
As of September 30, 1999, the Company has federal and state net operating
loss carryforwards of approximately $91.7 million and $57.3 million,
respectively, which amounts expire beginning in 2009 and 2001, respectively.
As a result of a change in ownership as defined by Section 382 of the Internal
Revenue Code, the Company's utilization of net operating loss carryforwards
will be subject to an annual limitation of approximately $878,000 for both
federal and state tax purposes, If the Company is able to recognize certain
built-in gains in the future, the annual utilization rate of the net operating
losses would be increased. If the Company were to recognize certain built-in
losses, they will be subject to the annual utilization limitation when
recognized.
F-54
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Based upon the Company's lack of prior earnings history and evaluation of
other available evidence, management has recorded a full valuation allowance
against the benefit of deferred tax assets. A reconciliation of the income tax
benefit computed using the U.S. federal statutory rate (34%) and the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
December 31, September 30,
1998 1999
------------ -------------
(in thousands)
<S> <C> <C>
Computed expected federal tax benefit.............. $(6,028) $(24,612)
Non-deductible Senior Notes debt interest.......... 392 1,239
State income taxes, net of federal benefit......... 6,121 (2,363)
Increase in valuation allowance.................... 123 22,635
Section 382 net operating loss limitations......... (591) --
Permanent difference--meals and entertainment
expenses.......................................... 5 43
Permanent difference--goodwill amortization........ -- 2,723
Permanent difference--Dina Partners stock
allocation (Note 12).............................. -- 643
Net operating loss carryforwards from
subsidiaries...................................... (113) (269)
Other.............................................. 91 (39)
------- --------
$ -- $ --
======= ========
</TABLE>
NOTE 12--MAJOR CUSTOMER
Revenue earned from one web integration contract with a variety of the
State of Oregon governmental agencies amounted to approximately $7.5 million,
or 21% of total contract revenue for the nine months ended September 30, 1999.
Also, approximately $1.3 million included in accounts receivable is related to
this contract as of September 30, 1999.
NOTE 13--LEGAL PROCEEDINGS
Dina Partners L.P.
On October 16, 1998, the Company filed a declaratory relief action in San
Diego Superior Court, asking the Court to find that the Company was not
obligated to offer stock to Dina Partners, L.P. ("Dina") in connection with
the December 30, 1997 equity investment by the Sturm Entities and ENA. On
September 3, 1999, the lawsuit was dismissed with prejudice. The Company did
not contribute any consideration to the settlement.
Prior to the dismissal of the lawsuit, certain shareholders of the Company
agreed to sell certain securities to Dina. In accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 79, the Company recorded a
capital contribution and corresponding one-time, non-cash charge during the
nine months ended September 30, 1999 in connection with this transaction in
the amount of $1.9 million.
City of Anaheim
On May 13, 1999, the City of Anaheim (the "City") filed a lawsuit in Orange
County Superior Court, Case Number 809281, against FirstWorld and FirstWorld
Anaheim (collectively "FirstWorld Parties"). The City alleges that the
FirstWorld Parties repudiated their contractual obligations under the
Universal Telecommunications System Participation Agreement (the
"Participation Agreement"), the Agreement for Use of Operating Property (the
"Operating Property Agreement") and the Development Fee Agreement (the
F-55
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
"Development Agreement," and together with the Participation Agreement and the
Operating Property Agreement, the "UTS Agreements"). In addition, the City
alleges, among other things, that the FirstWorld Parties materially breached
their obligations under the UTS Agreements by: (i) failing to commence
construction of a demonstration center in downtown Anaheim and that the
FirstWorld Parties will not commence operation of this downtown demonstration
center by June 30, 1999 under the UTS Agreements; (ii) failing to provide
verification that Substantial Completion of Phase I, as each such term is
defined in the UTS Agreements, has been achieved; (iii) failing to provide a
"Subsequent Implementation Program" (as defined in the UTS Agreements); (iv)
failing to comply with various auditing procedures in the UTS Agreements; and
(v) failing to make a quarterly payment due under the Participation Agreement.
The City alleges that it is entitled to damages in excess of $45.0 million as
well as costs, pre-judgment interest and such other relief as the Court deems
proper. The City also seeks specific performance compelling FirstWorld Parties
to completely perform certain obligations under the UTS Agreements.
In response to the lawsuit, the FirstWorld Parties filed a Motion to Compel
Arbitration. On September 16, 1999, the Court granted the Company's motion. On
October 6, 1999, the Court entered a written Order finding that there is a
valid arbitration provision in the agreements and that the City has not
established that the FirstWorld Parties unequivocally repudiated the UTS
Agreements. The court action has been stayed pending completion of the
arbitration. The City has not commenced arbitration procedures pursuant to the
terms of the UTS Agreement.
The Company believes that the FirstWorld Parties are not in breach as
alleged and intends to vigorously defend the action; however, there can be no
assurance that an unfavorable outcome of this dispute would not have a
material adverse effect on the Company's results of operations, liquidity or
financial position.
Other
The Company is engaged in other legal actions arising in the ordinary
course of its business and believes that the outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
NOTE 14--SUBSEQUENT EVENT
On December 2, 1999, the Company entered into an Equity Investment
Agreement (the "Agreement") with Spectra 4, LLC, an entity controlled by Mr.
Sturm ("Spectra 4"), for a $50.0 million equity commitment. The Agreement will
allow the Company to require that Spectra 4 purchase up to $50.0 million of
Series B common stock priced at $7.50 per share. The Agreement will expire on
the earlier of June 18, 2000 or the closing of an initial public offering by
the Company.
The Agreement contains three dates on which the Company can require that
Spectra 4 purchase the Company's Series B common stock. These dates are:
February 15, 2000, March 31, 2000 and the expiration date of the Agreement.
Additionally, if at any time after the effectiveness of the Agreement the
cash, cash equivalents and marketable securities position of the Company is
$20.0 million or less, the Company will automatically exercise $25.0 million
of the commitment. The Company is required to pay Spectra 4 a $5.0 million fee
for the commitment within three days following the earlier of the
effectiveness of the closing of an initial public offering by the Company or
the first purchase date under the Agreement. Such commitment fee will be
accounted for as a reduction of permanent equity upon payment.
F-56
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1998
------ ------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 220 $ 72,039
Restricted cash........................................ 50 --
Marketable securities.................................. -- 165,591
Interest receivable.................................... -- 3,017
Accounts receivable, net............................... 75 493
Prepaid expenses and other............................. 124 317
-------- --------
Total current assets............................... 469 241,457
-------- --------
Property and equipment, net.............................. 22,391 44,020
Deferred financing costs, net............................ 7,381 8,217
Other assets............................................. 303 411
-------- --------
Total assets....................................... $ 30,544 $294,105
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable....................................... $ 7,740 $ 6,611
Accrued payroll related liabilities.................... 144 222
Other accrued expenses................................. 1,352 749
Long-term debt, current portion........................ -- 30
Capital lease obligations, current portion............. 226 788
-------- --------
Total current liabilities.......................... 9,462 8,400
-------- --------
Long-term debt, net of current portion and discount ..... 15,606 249,726
Capital lease obligations including interest, net of
current portion......................................... 6,862 6,606
-------- --------
Total liabilities.................................. 31,930 264,732
-------- --------
Stockholders' equity:
Preferred stock, $.0001 par value per share, 10,000,000
shares authorized September 30, 1998; no shares
desigated, issued or outstanding...................... -- --
Common stock, voting, no par value, 100,000,000 shares
authorized at December 31, 1997:
Series A, 10,135,164 shares designated; 10,135,164
shares issued and outstanding....................... 20,778 --
Series B, 89,864,836 shares designated at December
31, 1997; 9,178,625 shares issued and outstanding... 16,160 --
Common stock, voting, $.0001 par value, 100,000,000
shares authorized at September 30, 1998:
Series A, 10,135,164 shares designated; 10,135,164
shares issued and outstanding....................... -- 1
Series B, 89,864,836 shares designated; 15,929,708
shares issued and outstanding....................... -- 2
Additional paid-in capital............................. -- 45,617
Warrants............................................... 10,629 31,963
Stockholder receivables................................ (30,097) (97)
Accumulated deficit.................................... (18,855) (48,113)
-------- --------
Total stockholders' equity......................... (1,385) 29,373
-------- --------
Total liabilities and stockholders' equity......... $ 30,544 $294,105
======== ========
</TABLE>
See notes to consolidated financial statements.
F-57
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Revenue:
Internet services................................................................................. $ -- $ --
Web integration and consulting services........................................................... -- --
Telephony services................................................................................ 114 977
--------- ----------
Total revenue................................................................................... 114 977
--------- ----------
Cost and expenses:
Network and service costs......................................................................... 144 885
Selling, general and administrative expenses...................................................... 2,248 13,865
Depreciation and amortization..................................................................... 478 1,947
--------- ----------
Total costs and expenses........................................................................ 2,870 16,697
--------- ----------
Loss from operations................................................................................ (2,756) (15,720)
Other income (expense):
Interest income................................................................................... 7 6,742
Interest expense.................................................................................. (1,349) (15,549)
--------- ----------
Total other expense............................................................................. (1,342) (8,807)
--------- ----------
Net loss before extraordinary item.................................................................. (4,098) (24,527)
Extraordinary item--extinguishment of debt.......................................................... -- (4,731)
--------- ----------
Net loss............................................................................................ $ (4,098) $ (29,258)
========= ==========
Basic and diluted loss per common share:
Loss before extraordinary item.................................................................... $ (1.25) $ (1.05)
Extraordinary item-extinguishment of debt......................................................... -- (.20)
--------- ----------
Net loss per common share......................................................................... $ (1.25) $ (1.25)
========= ==========
Weighted average shares outstanding--basic and diluted.............................................. 3,265,567 23,411,474
========= ==========
</TABLE>
See notes to consolidated financial statements.
F-58
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Series A Series B
Common Stock Common Stock Additional
------------------- ------------------- Paid-in
Shares Amount Shares Amount Capital
---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at October 1,
1997.................... -- $ -- -- $ -- $ --
Exercise of options to
purchase common stock--
October 1997 to December
1997.................... -- -- -- -- --
Issuance of Series A
common stock with
warrants to purchase
10,135,164 shares of
Series B common stock,--
December 30, 1997....... 10,135,164 20,778 -- -- --
Conversion of Series C
preferred stock, Series
B preferred stock,
Series A preferred stock
and common stock to
Series B common stock--
December 30, 1997; as
follows:
Series C preferred stock;
conversion ratio of
1.39:1, including anti-
dilutive adjustments.... -- -- 3,621,120 12,279 --
Series B preferred stock
and common stock;
conversion ratio of
1:1..................... -- -- 5,545,638 3,486 --
Series A preferred stock;
conversion ratio of
1:10.................... -- -- 11,867 395 --
Net loss for the three-
month period ended
December 31, 1997....... -- -- -- -- --
---------- -------- ---------- -------- -------
Balance at December 31,
1997.................... 10,135,164 20,778 9,178,625 16,160 --
---------- -------- ---------- -------- -------
Issuance of Series B
common stock with
warrants to purchase
6,666,666 shares of
Series B common stock,
net of offering costs of
$1,800--April 13, 1998.. -- -- 6,666,666 12,467 --
Proceeds associated with
the issuance of Series A
common stock, net of
offering cost of
$3,864.................. -- (3,864) -- -- --
Issuance of warrants to
purchase 3,713,094
shares of Series B
common stock in
connection with the
issuance of 13% Senior
Discount Notes.......... -- -- -- -- --
Exercise of options to
purchase Series B common
stock--April 1998 to May
1998.................... -- -- 67,917 56 --
Establishment of $.0001
par value for Series A
and B common stock in
connection with Delaware
reincorporation--June
26, 1998................ -- (16,913) -- (28,681) 45,594
Exercise of options to
purchase Series B common
stock................... 16,500 23
Net loss for the nine-
month period ended
September 30, 1998...... -- -- -- -- --
---------- -------- ---------- -------- -------
Balance at September 30,
1998.................... 10,135,164 $ 1 15,929,708 $ 2 $45,617
========== ======== ========== ======== =======
</TABLE>
F-59
<PAGE>
<TABLE>
<CAPTION>
Series C Series B Series A Deficit
Convertible Convertible Convertible Accumulated Total
Preferred Stock Preferred Stock Preferred Stock Common Stock During Shareholders'
- --------------------- ------------------- ----------------- ------------------ Shareholder Development Equity
Shares Amount Shares Amount Shares Amount Shares Amount Warrants Receivables Stage (Deficit)
------ -------- ---------- ------- --------- ------ ---------- ------ -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2,600,000 $ 12,279 2,016,638 $ 3,670 118,667 $ 395 3,262,900 $(227) $ 1,001 $ (97) $(14,757) $ 2,264
-- -- -- -- -- -- 266,100 43 -- -- -- 43
-- -- -- -- -- -- -- -- 9,628 (30,000) -- 406
(2,600,000) (12,279) -- -- -- -- -- -- -- -- -- --
-- -- (2,016,638) (3,670) -- -- (3,529,000) 184 -- -- -- --
-- -- -- -- (118,667) (395) -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- (4,098) (4,098)
- ---------- -------- ---------- ------- --------- ----- ---------- ----- ------- ------- -------- --------
-- -- -- -- -- -- -- -- 10,629 (30,097) (18,855) (1,385)
- ---------- -------- ---------- ------- --------- ----- ---------- ----- ------- ------- -------- --------
-- -- -- -- -- -- -- -- 6,333 -- -- 18,800
-- -- -- -- -- -- -- -- -- 30,000 -- 26,136
-- -- -- -- -- -- -- -- 15,001 -- -- 15,001
-- -- -- -- -- -- -- -- -- -- -- 56
-- -- -- -- -- -- -- -- -- -- -- --
23
-- -- -- -- -- -- -- -- -- -- (29,258) (29,258)
- ---------- -------- ---------- ------- --------- ----- ---------- ----- ------- ------- -------- --------
-- $ -- -- $ -- -- $ -- -- $ -- $31,963 $ (97) $(48,113) $ 29,373
========== ======== ========== ======= ========= ===== ========== ===== ======= ======= ======== ========
</TABLE>
F-60
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(4,098) $(29,258)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization expense.............. 478 1,947
Amortization of deferred financing costs........... 358 845
Accretion of senior notes.......................... 120 14,451
Non-cash interest expense.......................... 293 --
Extraordinary loss on extinguishment of debt....... 3,731
Changes in assets and liabilities, net of effects
of acquisitions:
Restricted cash.................................... -- 50
Accounts receivable............................... (3) (418)
Interest receivable............................... -- (3,016)
Other assets...................................... (17) (297)
Accounts payable.................................. -- 4,702
Other liabilities................................. 1,752 (1,753)
------- --------
Net cash (used) provided by operating
activities...................................... (1,117) (9,016)
------- --------
Cash flows from investing activities:
Purchases of held-to-maturity marketable
securities........................................ -- (236,701)
Maturities of held-to-maturity marketable
securities........................................ -- 71,110
Purchase of property and equipment................. (2,490) (23,578)
------- --------
Net cash (used) provided by investing
activities...................................... (2,490) (189,169)
------- --------
Cash flows from financing activities:
Proceeds from issuance of senior discount notes and
related warrants.................................. -- 250,205
Proceeds from issuance of Series A Common Stock and
related warrants.................................. -- 26,136
Proceeds from issuance of Series B Common Stock and
related warrants.................................. 43 18,757
Proceeds from exercise of stock options and
warrants.......................................... -- 129
Principal payments on debt and capital leases...... (70) (702)
Payments on revolving credit facility.............. -- (16,300)
Proceeds from short-term borrowings and related
warrants.......................................... 3,370 426
Payment of deferred financing costs................ -- (8,647)
Principal payments on borrowings................... (52) --
------- --------
Net cash provided (used) by financing
activities...................................... 3,291 270,004
------- --------
Net (decrease) increase in cash and cash
equivalents........................................ (316) 71,819
Cash and cash equivalents, beginning of period...... 536 220
------- --------
Cash and cash equivalents, end of period............ $ 220 $ 72,039
======= ========
</TABLE>
See notes to consolidated financial statements.
F-61
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The consolidated financial statements include the accounts of FirstWorld
Communications, Inc. ("FirstWorld") and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany transactions and
balances have been eliminated in consolidation.
In the opinion of management, the accompanying consolidated financial
statements include all adjustments (consisting of normal recurring items)
necessary for a fair presentation of results for the interim periods presented
for the Company. The results of operations for any interim period are not
necessarily indicative of results for the full year. The consolidated
financial statements and footnote disclosures should be read in conjunction
with the audited consolidated financial statements and related notes thereto
included elsewhere in this prospectus. Certain 1998 amounts have been
reclassified to conform to the 1999 basis of presentation.
NOTE 2--EARNINGS PER SHARE
The Company calculates net loss per share in accordance with SFAS No. 128,
"Earnings Per Share." In accordance with SFAS No. 128, basic earnings per
share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is determined in the
same manner as basic earnings per share except that the number of shares is
increased assuming exercise of dilutive stock options, purchase rights and
warrants using the treasury stock method and conversion of the Company's
convertible preferred stock using the if-converted method.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, 1997 September 30, 1998
----------------- ------------------
<S> <C> <C>
Potential Common Shares Underlying:
Options................................... 98,388 2,681,932
Purchase rights........................... -- 300,000
Warrants.................................. 14,421,605 25,188,021
Convertible Preferred Series A............ 11,867 (A) --
Convertible Preferred Series B............ 2,016,638 (B) --
Convertible Preferred Series C............ 3,621,120 (C) --
---------- ----------
20,169,618 28,169,953
========== ==========
</TABLE>
(A) 118,667 Series A preferred shares at December 31, 1997 converted at a
ratio of 1:10.
(B) 2,016,638 Series B preferred shares at December 31, 1997 converted at a
ratio of 1:1.
(C) 2,600,000 Series C preferred shares at December 30, 1997 converted at a
ratio of 1.39:1.
NOTE 3--OTHER MATTERS
The Company is engaged in other legal actions arising in the ordinary
course of its business and believes that the outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
F-62
<PAGE>
Shares
[FIRSTWORLD LOGO]
FirstWorld Communications, Inc.
Series B Common Stock
------------------
PROSPECTUS
, 2000
------------------
Lehman Brothers
Bear, Stearns & Co. Inc.
Deutsche Banc Alex. Brown
PaineWebber Incorporated
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated December 22, 1999
PROSPECTUS
Shares
FirstWorld Communications, Inc.
Series B Common Stock
--------------------------------------------------------
This is our initial public offering of shares of common stock. We are offering
shares. No public market exists for our shares. Of the shares
being offered, we are offering shares outside the United States and
Canada and shares in the United States and Canada.
We propose to list the shares on the Nasdaq National Market under the symbol
"FWIS". We anticipate the public offering price to be between $ and $
per share.
Investing in the shares involves risks. Risk Factors begin on page 7.
<TABLE>
<CAPTION>
Per Share Total
--------- ---------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds to FirstWorld Communications....................... $ $
</TABLE>
We have granted the underwriters the right to purchase up to additional
shares within 30 days to cover any over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 2000.
--------------------------------------------------------
Lehman Brothers
Bear, Stearns International Limited
Deutsche Bank
PaineWebber International
, 2000
<PAGE>
Shares
[Firstworld Communications Logo Appears Here]
FirstWorld Communications, Inc.
Series B Common Stock
------------------
PROSPECTUS
, 2000
------------------
Lehman Brothers
Bear, Stearns International Limited
Deutsche Bank
PaineWebber International
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by the registrant in connection
with the sale of the common stock being registered hereby. All amounts shown
are estimates, except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.......... $ 26,400
NASD filing fee.............................................. 10,500
Nasdaq National Market listing application fee............... 5,000
Blue Sky fees and expenses................................... 5,000
Printing and engraving expenses.............................. 200,000
Legal fees and expenses...................................... 300,000
Accounting fees and expenses................................. 250,000
Directors' and officers' insurance........................... 300,000
Transfer agent and registrar fees............................ 10,000
Miscellaneous expenses....................................... 193,100
----------
TOTAL...................................................... $1,300,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
The registrant's amended and restated bylaws that will become effective
upon the closing of this offering provide that the company will indemnify its
directors and executive officers to the fullest extent permitted by Delaware
law and may indemnify its other officers, employees and other agents to the
fullest extent permitted by Delaware law.
In addition, the registrant's restated certificate of incorporation that
will become effective upon the closing of this offering provides that, to the
fullest extent permitted by Delaware law, its directors will not be personally
liable to the registrant or its stockholders for monetary damages for any
breach of fiduciary duty as directors. This provision of the restated
certificate of incorporation does not eliminate the directors' duty of care.
In appropriate circumstances, equitable remedies such as an injunction or
other forms of non-monetary relief are available under Delaware law. This
provision also does not affect the directors' responsibilities under any other
laws, such as the federal securities laws and state and federal environmental
laws.
Each director will continue to be subject to liability for:
. breach of a director's duty of loyalty to the company and its
stockholders;
. acts or omissions not in good faith, gross negligence, or that involve
intentional misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
. any transaction from which a director derived an improper personal
benefit.
The registrant has entered into indemnification agreements with its
directors and executive officers and has obtained directors' and officers'
liability insurance.
There is no pending litigation or proceeding involving any of the company's
directors or officers as to which indemnification is being sought. The company
is not aware of any pending or threatened litigation that may result in a
claim for indemnification.
Item 15. Recent Sales of Unregistered Securities.
The company has issued and sold the following securities since December 1,
1996:
II-1
<PAGE>
Between December 1996 and November 1999, 1,174,156 shares of the Company's
Series B common stock were issued upon exercise of stock options granted under
the Company's 1995 Stock Option Plan and 1997 Stock Option Plan, at exercise
prices between $0.15 and $7.50 per share.
On January 29, 1997, the Company issued and sold an aggregate of 1,044,700
shares of its Series C preferred stock for cash and issued 1,555,300 upon
retirement of certain convertible bridge notes. In addition, warrants to
purchase an aggregate of 520,000 shares of common stock were issued to such
investors and note holders at an initial exercise price of $5.00 per share.
Upon consummation of the equity restructuring of the Company, however, the
shares and warrants were converted into an aggregate of 3,621,120 shares of
Series B common stock and warrants to purchase 736,564 shares of Series B
common stock at a purchase price of $3.53 per share. In connection with this
private placement, the Company also issued to financial advisors warrants to
purchase 218,118 and 15,000 shares of common stock at purchase prices of $5.00
and $0.50, respectively. In March 1997, 5,000 shares of common stock were
issued upon exercise of one of the financial advisor warrants at a purchase
price of $0.50 per share. As a result of the equity restructuring, these
warrants were converted into warrants to purchase shares of Series B common
stock.
On January 29, 1997, the Company issued warrants to purchase 800,000 shares
of common stock to a single investor at an initial purchase price of $4.75 per
share. On December 30, 1997, the warrant was amended to increase the number of
shares exercisable to 2,110,140 shares of Series B common stock and to
decrease the purchase price to $1.80 per share.
Warrants to purchase 19,000 and 5,000 shares of common stock at prices of
$0.50 and $5.00, respectively, were issued in January 1997 in consideration
for legal services provided to the Company. As a result of the equity
restructuring, these warrants were converted into warrants to purchase shares
of Series B common stock.
On May 29, 1997, 60,000 shares of common stock were issued upon conversion
of Series B preferred stock. These shares were converted to Series B common
stock upon consummation of the Company's equity restructuring.
During August and September 1997, in connection with a short-term bridge
financing, the Company issued to a certain lender a warrant to purchase
300,000 shares of common stock at an initial purchase price of $6.00 per
share. As a result of the equity restructuring of the Company, this warrant
was converted into a warrant to purchase 470,092 shares of Series B common
stock at a purchase price of $3.83 per share.
On September 16, 1997, 156,208 shares of Series A preferred stock, which
were later converted to 1,562 shares of Series B common stock as a result of
the equity restructuring, were issued to an entity as compensation for
services rendered to the Company.
During July and September 1997, warrants to purchase 33,789 shares of
common stock were issued at a purchase price of $6.00 per share to the holders
of certain convertible bridge notes issued in July 1997. As a result of the
equity restructuring, these warrants were converted into warrants to purchase
shares of Series B common stock.
On September 17, 1997, the lender involved in the Company's revolving
credit facility was issued a warrant to purchase 800,000 shares of Series B
common stock at an initial purchase price of $6.00 per share. This warrant was
later amended and replaced on December 30, 1997 and on April 13, 1998. The
current purchase price of the warrant is $3.00 per share. Upon consummation of
the revolving credit facility, the Company also issued warrants to certain
financial advisors to purchase 83,400 shares of common stock at a purchase
price of $6.00 per share. As a result of the equity restructuring, these
warrants were converted into warrants to purchase shares of Series B common
stock.
In connection with the equity restructuring of the Company on December 30,
1997, all outstanding shares of the Company's previously issued common stock,
Series A preferred stock, Series B preferred stock and Series C preferred
stock were converted into 9,178,625 shares of Series B common stock.
II-2
<PAGE>
On December 30, 1997, 10,000,000 shares of Series A common stock and
warrants to purchase 10,000,000 shares of Series B common stock at a purchase
price of $3.00 per share were issued by the Company to certain investors. At
the same time, 135,164 shares of Series A common stock and warrants to
purchase 135,164 shares of Series B common stock at a purchase price of $3.00
per share were issued upon automatic conversion to the holders of certain
convertible subordinated bridge notes. In connection with the Series A common
stock private placement, warrants were also issued to certain financial
advisors to purchase 17,500 and 30,000 shares of Series B common stock at
purchase prices of $6.00 and $5.00 per share, respectively.
On April 13, 1998, 6,666,666 shares of Series B common stock and warrants
to purchase 6,666,666 shares of Series B common stock at a purchase price of
$3.00 per share were issued to two existing investors pursuant to the exercise
of options held by them in connection with the Company's December 30, 1997
private placement.
In connection with the issuance and sale of its debt offering on April 13,
1998, the Company issued warrants to purchase 3,713,094 shares of Series B
common stock, at a purchase price of $0.01 per share.
On January 7, 1999, 187,500 shares of Series B common stock were issued
pursuant to the Company's acquisition of Accelerated Information, Inc.
On February 11, 1999, 42,250 shares of Series B common stock were issued to
employees of the Company who participated in the 1998 Employee Stock Purchase
Plan in November 1998.
The Company issued 285,000 shares of Series B common stock in connection
with its acquisition of Sirius Solutions, Inc. on March 2, 1999.
In connection with the Hypercon acquisition on June 2, 1999, the Company
issued 49,993 shares of Series B common stock.
On June 14, 1999, the Company issued 30,000 shares of Series B common stock
in connection with its acquisition of Internet Express.
Between March and November 1999, 109,495 shares of the Company's Series B
common stock were issued upon exercise of common stock Purchase Warrants, at a
purchase price of $1.50 per share.
In connection with the Transport Logic acquisition, the Company issued
392,935 shares of Series B common stock on July 7, 1999.
The Company issued 875,000 shares of Series B common stock on July 14, 1999
in connection with its acquisition of Intelenet.
As of November 30, 1999, 14,116 shares of Series B common stock have been
issued to certain employees under the Company's quarterly stock bonus program.
All of the above transactions were completed without registration in
reliance upon the exemption provided by Section 4(2) of the Securities Act of
1933, as amended, for transactions not involving a public offering. All of the
above-referenced option shares and bonus shares were subsequently registered
on Form S-8s filed with the Commission on October 10, 1998, April 14, 1999 and
May 17, 1999.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as amended.
(3)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
3.2* Certificate of Amendment of Certificate of Incorporation of
the Registrant.
3.3 Bylaws of the Registrant, as amended. (3)
4.1 Reference is made to Exhibits 3.1 through 3.3.
4.2* Specimen stock certificate representing shares of Series B
Common Stock of the Registrant.
4.3 Purchase Agreement, dated April 6, 1998, among the
Registrant, Bear, Stearns & Co. Inc., ING Barings (U.S.)
Securities, Inc., J.P. Morgan Securities, Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated. (1)
4.4 Indenture, dated as of April 13, 1998, between the
Registrant and The Bank of New York. (1)
4.5 Form of 13% Senior Discount Notes due 2008 and schedule of
13% Senior Discount Notes due 2008. (1)
4.6 Registration Rights Agreement, dated as of April 13, 1998,
among the Registrant and the Initial Purchasers. (1)
5.1* Opinion of Cooley Godward LLP regarding the legality of the
securities being registered.
10.1 Form of Indemnification Agreement entered into by the
Registrant and each of its executive officers and directors
and schedule listing all executive officers and directors
who have executed an Indemnification Agreement. (3)
10.2 1995 Stock Option Plan and related form of option agreement.
(1)
10.3 1997 Stock Option Plan and related form of option agreement.
(1)
10.4 Warrant Agreement, dated as of April 13, 1998, among the
Registrant and the Initial Purchasers and related form of
warrant attached thereto. (1)
10.5 Warrant Registration Rights Agreement, dated as of April 13,
1998, among the Registrant and the Initial Purchasers. (1)
10.6 Common Stock Purchase Agreement, dated as of December 30,
1997, among the Registrant, Colorado Spectra 3, LLC, Enron
Capital & Trade Resources Corp. and the holders of $405,000
in principal amount of the Registrant's convertible
subordinated promissory notes. (1)
10.7 First Amendment to Common Stock Purchase Agreement, dated as
of February 9, 1998, among the Registrant, Colorado Spectra
3, LLC and Enron Capital & Trade Resources Corp. (1)
10.8 Amended and Restated Investor Rights Agreement, dated as of
April 13, 1998, among the Registrant and the Investors set
forth therein, as amended. (2)
10.9 Securityholders Agreement, dated as of December 20, 1997,
among the Registrant, Enron Capital & Trade Resources Corp.,
Colorado Spectra 1, LLC, Colorado Spectra 2, LLC and
Colorado Spectra 3, LLC, as amended. (2)
10.10 Business Opportunity Agreement, dated as of December 30,
1997, among the Registrant, Enron Capital & Trade Resources
Corp., Colorado Spectra 1, LLC, Colorado Spectra 2, LLC and
Colorado Spectra 3, LLC. (1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.11 Management Consulting Services Agreement, dated as of
December 30, 1997, as amended by that First Amendment to
Management to Management Consulting Services Agreement dated
as of March 17, 1998, between the Registrant and Corporate
Managers, LLC. (1)
10.12 Management Consulting Services Agreement, dated as of
December 30, 1997, between the Registrant and Enron Trade &
Capital Resources Corp. (1)
10.13 Form of Warrant to Purchase Series B Common Stock and
schedule listing all holders of such warrants entitled to
purchase a number of shares of Series B Common Stock equal
to or greater that 1% of the Company's common stock
outstanding as of May 31, 1998. (1)
10.14 Warrant to Purchase 2,110,140 shares of Series B Common
Stock issued to Colorado Spectra 2, LLC on December 30, 1997.
(1)
10.15 Agreement for Use of Operating Property, dated as of
February 25, 1997, between FirstWorld Anaheim and the City
of Anaheim. (1)
10.16 Universal Telecommunications System Participation Agreement,
dated as of February 25, 1997, among the Registrant,
FirstWorld Anaheim and the City of Anaheim. (1)
10.17 Development Fee Agreement, dated as of February 25, 1997,
between the Registrant and the City of Anaheim. (1)
10.18** Agreement for Lease of Telecommunications Conduit, dated as
of March 5, 1998, between FirstWorld Orange Coast and The
Irvine Company. (4)
10.19** Telecommunications System License Agreement, dated as of
March 5, 1998, between FirstWorld Orange Coast and The
Irvine Company. (4)
10.20 Office Lease for Genesee Executive Plaza, dated as of
September 4, 1996, between Talcott Realty I Limited
Partnership and the Registrant. (1)
10.21 Standard Industrial/Commercial Single-Tenant Lease-Gross,
dated as of August 26, 1996, between Scope Development and
FirstWorld Anaheim. (1)
10.22 SpectraNet International Founders' Sale Agreement. (3)
10.23 System Acquisition Agreement. (3)
10.24 Employment Agreement between the Registrant and Sheldon S.
Ohringer. (4)
10.25 Stock Option Agreement between the Registrant and Sheldon S.
Ohringer. (5)
10.26 Employment Agreement between the Registrant and Scott Chase.
(6)
10.27 Employment Agreement between the Registrant and Marion K.
Jenkins. (6)
10.28 Employment Agreement between the Registrant and David
Gandini. (6)
10.29 Employment Agreement between the Registrant and Doug Kramer.
(6)
10.30 Lease between the Registrant and The Prudential Insurance
Company of America. (6)
10.31 First Amendment to Lease (Genesee Executive Plaza), dated as
of July 31, 1998, between Arden Realty Limited Partnership
(successor in interest to Talcott Realty I Limited
Partnership) and the Registrant. (6)
10.32 Second Amendment to Management Consulting Services
Agreement, dated as of October 1, 1998, between the
Registrant and Corporate Managers, LLC. (6)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.33 First Amendment to Amended and Restated Investors Rights
Agreement, dated as of September 28, 1998, among the
Registrant, Enron Capital & Trade Resources Corp., Colorado
Spectra 1, LLC, Colorado Spectra 2, LCC and Colorado Spectra
3, LLC. (6)
10.34 Employment Agreement, as amended, between the Registrant and
Jeffrey L. Dykes. (7)
10.35 Firstworld Communications, Inc. Quarterly Bonus Program. (8)
10.36 The 1999 Equity Incentive Plan of FirstWorld Communications,
Inc. (the "1999 Plan"). (9)
10.37 Form of Incentive Stock Option Agreement of FirstWorld
Communications, Inc. under the 1999 Plan. (9)
10.38 Form of Non-Qualified Stock Option Agreement of FirstWorld
Communications, Inc. under the 1999 Plan. (9)
10.39 Form of Stock Appreciation Right Award Agreement of
FirstWorld Communications, Inc. under the 1999 Plan. (9)
10.40 First Amendment to Employment Agreement, dated as of May 20,
1999, between the Registrant and Sheldon S. Ohringer. (10)
10.41 Office Lease, dated June 28, 1999, between Board of
Administration as Trustee for the Police and Fire Department
Retirement Fund and the Registrant. (10)
10.42 Equity Investment Agreement, effective as of December 22,
1999, as amended, between the Registrant and Colorado
Spectra 4, LLC.
21.1 Subsidiaries of the Registrant, as amended.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on Page II-8).
27.1 Financial Data Schedule. (11)
</TABLE>
- --------
* To be filed by amendment.
** Portions of this exhibit have been omitted pursuant to an order granting
confidential treatment filed with the Securities and Exchange Commission.
(1) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-4 (No. 333-57829) filed with the Securities and
Exchange Commission on June 26, 1998.
(2) Original agreement incorporated by reference to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with the
Securities and Exchange Commission on August 24, 1998; amendment dated
December 22, 1999 filed herewith.
(3) Incorporated herein by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with the
Securities and Exchange Commission on August 24, 1998.
(4) Incorporated herein by reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with the
Securities and Exchange Commission on October 8, 1998.
(5) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (No. 333-68195) filed with the Securities and
Exchange Commission on December 1, 1998.
(6) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K filed with the Securities and Exchange Commission on August 16, 1999.
(7) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on February
12, 1999.
II-6
<PAGE>
(8) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-8 (No. 333-78611) filed with the Securities and Exchange
Commission on May 17, 1999.
(9) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-8 (No. 333-76325) filed with the Securities and Exchange
Commission on April 14, 1999.
(10) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on August 16,
1999.
(11) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on November 15,
1999.
(b) Financial Statement Schedules.
Not applicable.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Greenwood
Village, County of Arapahoe, State of Colorado, on December 22, 1999.
/s/ Sheldon S. Ohringer
By: ---------------------------------
Sheldon S. Ohringer
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jeffrey L. Dykes and Paul C. Adams and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments, exhibits thereto and other documents in connection
therewith) to this Registration Statement and any subsequent registration
statement filed by the registrant pursuant to Rule 462(b) of the Securities
Act of 1933, as amended, which relates to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Sheldon S. Ohringer President and Chief December 22, 1999
- ------------------------------------- Executive Officer
Sheldon S. Ohringer (Principal Executive
Officer)
/s/ Paul C. Adams Vice President, Finance, December 22, 1999
- ------------------------------------- Treasurer and Assistant
Paul C. Adams Secretary (Principal
Financial and Accounting
Officer)
/s/ Donald L. Sturm Chairman of the Board December 22, 1999
- -------------------------------------
Donald L. Sturm
/s/ C. Kevin Garland Director December 22, 1999
- -------------------------------------
C. Kevin Garland
/s/ Stephen R. Horn Director December 22, 1999
- -------------------------------------
Stephen R. Horn
/s/ James O. Spitzenberger Director December 22, 1999
- -------------------------------------
James O. Spitzenberger
/s/ John C. Stiska Director December 22, 1999
- -------------------------------------
John C. Stiska
/s/ Melanie L. Sturm Director December 22, 1999
- -------------------------------------
Melanie L. Sturm
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as amended. (3)
3.2* Certificate of Amendment of Certificate of Incorporation of the
Registrant.
3.3 Bylaws of the Registrant, as amended. (2)
4.1 Reference is made to Exhibits 3.1 through 3.3.
4.2* Specimen stock certificate representing shares of Series B
Common Stock of the Registrant.
4.3 Purchase Agreement, dated April 6, 1998, among the Registrant,
Bear, Stearns & Co. Inc., ING Barings (U.S.) Securities, Inc.,
J.P. Morgan Securities, Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated. (1)
4.4 Indenture, dated as of April 13, 1998, between the Registrant
and The Bank of New York. (1)
4.5 Form of 13% Senior Discount Notes due 2008 and schedule of 13%
Senior Discount Notes due 2008. (1)
4.6 Registration Rights Agreement, dated as of April 13, 1998, among
the Registrant and the Initial Purchasers. (1)
5.1* Opinion of Cooley Godward LLP regarding the legality of the
securities being registered.
10.1 Form of Indemnification Agreement entered into by the Registrant
and each of its executive officers and directors and schedule
listing all executive officers and directors who have executed
an Indemnification Agreement. (3)
10.2 1995 Stock Option Plan and related form of option agreement. (1)
10.3 1997 Stock Option Plan and related form of option agreement. (1)
10.4 Warrant Agreement, dated as of April 13, 1998, among the
Registrant and the Initial Purchasers and related form of
warrant attached thereto. (1)
10.5 Warrant Registration Rights Agreement, dated as of April 13,
1998, among the Registrant and the Initial Purchasers. (1)
10.6 Common Stock Purchase Agreement, dated as of December 30, 1997,
among the Registrant, Colorado Spectra 3, LLC, Enron Capital &
Trade Resources Corp. and the holders of $405,000 in principal
amount of the Registrant's convertible subordinated promissory
notes. (1)
10.7 First Amendment to Common Stock Purchase Agreement, dated as of
February 9, 1998, among the Registrant, Colorado Spectra 3, LLC
and Enron Capital & Trade Resources Corp. (1)
10.8 Amended and Restated Investor Rights Agreement, dated as of
April 13, 1998, among the Registrant and the Investors set forth
therein, as amended. (2)
10.9 Securityholders Agreement, dated as of December 20, 1997, among
the Registrant, Enron Capital & Trade Resources Corp., Colorado
Spectra 1, LLC, Colorado Spectra 2, LLC and Colorado Spectra 3,
LLC, as amended. (2)
10.10 Business Opportunity Agreement, dated as of December 30, 1997,
among the Registrant, Enron Capital & Trade Resources Corp.,
Colorado Spectra 1, LLC, Colorado Spectra 2, LLC and Colorado
Spectra 3, LLC. (1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.11 Management Consulting Services Agreement, dated as of December
30, 1997, as amended by that First Amendment to Management to
Management Consulting Services Agreement dated as of March 17,
1998, between the Registrant and Corporate Managers, LLC. (1)
10.12 Management Consulting Services Agreement, dated as of December
30, 1997, between the Registrant and Enron Trade & Capital
Resources Corp. (1)
10.13 Form of Warrant to Purchase Series B Common Stock and schedule
listing all holders of such warrants entitled to purchase a
number of shares of Series B Common Stock equal to or greater
that 1% of the Company's common stock outstanding as of May 31,
1998. (1)
10.14 Warrant to Purchase 2,110,140 shares of Series B Common Stock
issued to Colorado Spectra 2, LLC on December 30, 1997. (1)
10.15 Agreement for Use of Operating Property, dated as of February
25, 1997, between FirstWorld Anaheim and the City of Anaheim.
(1)
10.16 Universal Telecommunications System Participation Agreement,
dated as of February 25, 1997, among the Registrant, FirstWorld
Anaheim and the City of Anaheim. (1)
10.17 Development Fee Agreement, dated as of February 25, 1997,
between the Registrant and the City of Anaheim. (1)
10.18** Agreement for Lease of Telecommunications Conduit, dated as of
March 5, 1998, between FirstWorld Orange Coast and The Irvine
Company. (4)
10.19** Telecommunications System License Agreement, dated as of March
5, 1998, between FirstWorld Orange Coast and The Irvine Company.
(4)
10.20 Office Lease for Genesee Executive Plaza, dated as of September
4, 1996, between Talcott Realty I Limited Partnership and the
Registrant. (1)
10.21 Standard Industrial/Commercial Single-Tenant Lease-Gross, dated
as of August 26, 1996, between Scope Development and FirstWorld
Anaheim. (1)
10.22 SpectraNet International Founders' Sale Agreement. (3)
10.23 System Acquisition Agreement. (3)
10.24 Employment Agreement between the Registrant and Sheldon S.
Ohringer. (4)
10.25 Stock Option Agreement between the Registrant and Sheldon S.
Ohringer. (5)
10.26 Employment Agreement between the Registrant and Scott Chase. (6)
10.27 Employment Agreement between the Registrant and Marion K.
Jenkins. (6)
10.28 Employment Agreement between the Registrant and David Gandini.
(6)
10.29 Employment Agreement between the Registrant and Doug Kramer. (6)
10.30 Lease between the Registrant and The Prudential Insurance
Company of America. (6)
10.31 First Amendment to Lease (Genesee Executive Plaza), dated as of
July 31, 1998, between Arden Realty Limited Partnership
(successor in interest to Talcott Realty I Limited Partnership)
and the Registrant. (6)
10.32 Second Amendment to Management Consulting Services Agreement,
dated as of October 1, 1998, between the Registrant and
Corporate Managers, LLC. (6)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.33 First Amendment to Amended and Restated Investors Rights
Agreement, dated as of September 28, 1998, among the Registrant,
Enron Capital & Trade Resources Corp., Colorado Spectra 1, LLC,
Colorado Spectra 2, LCC and Colorado Spectra 3, LLC. (6)
10.34 Employment Agreement, as amended, between the Registrant and
Jeffrey L. Dykes. (7)
10.35 Firstworld Communications, Inc. Quarterly Bonus Program. (8)
10.36 The 1999 Equity Incentive Plan of FirstWorld Communications,
Inc. (the "1999 Plan"). (9)
10.37 Form of Incentive Stock Option Agreement of FirstWorld
Communications, Inc. under the 1999 Plan. (9)
10.38 Form of Non-Qualified Stock Option Agreement of FirstWorld
Communications, Inc. under the 1999 Plan. (9)
10.39 Form of Stock Appreciation Right Award Agreement of FirstWorld
Communications, Inc. under the 1999 Plan. (9)
10.40 First Amendment to Employment Agreement, dated as of May 20,
1999, between the Registrant and Sheldon S. Ohringer. (9)
10.41 Office Lease, dated June 28, 1999, between Board of
Administration as Trustee for the Police and Fire Department
Retirement Fund and the Registrant. (10)
10.42 Equity Investment Agreement, effective as of December 22, 1999,
as amended, betweeen the Registrant and Colorado Spectra 4, LLC.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on Page II-8).
27.1 Financial Data Schedule. (11)
</TABLE>
- --------
* To be filed by amendment.
** Portions of this exhibit have been omitted pursuant to an order granting
confidential treatment filed with the Securities and Exchange Commission.
(1) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-4 (No. 333-57829) filed with the Securities and
Exchange Commission on June 26, 1998.
(2) Original agreement incorporated by reference to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with Securities and
Exchange Commission on August 24, 1998; amendment dated December 22, 1998
filed herewith.
(3) Incorporated herein by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with the
Securities and Exchange Commission on August 24, 1998.
(4) Incorporated herein by reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with the
Securities and Exchange Commission on October 8, 1998.
(5) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (No. 333-68195) filed with the Securities and
Exchange Commission on December 1, 1998.
(6) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K filed with the Securities and Exchange Commission on August 16, 1999.
<PAGE>
(7) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on February
12, 1999.
(8) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (No. 333-78611) filed with the Securities and
Exchange Commission on May 17, 1999.
(9) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (No. 333-76325) filed with the Securities and
Exchange Commission on April 14, 1999.
(10) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on August 16,
1999.
(11) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on November 15,
1999.
<PAGE>
EXHIBIT 10.8
FIRSTWORLD COMMUNICATIONS, INC.
AMENDMENT TO INVESTOR RIGHTS AGREEMENT
AND WAIVER OF RIGHT OF FIRST REFUSAL
This AMENDMENT TO INVESTOR RIGHTS AGREEMENT AND WAIVER OF RIGHT OF FIRST
REFUSAL (the "Amendment and Waiver"), effective as of December 2, 1999, is
entered into by and among FirstWorld Communication, Inc. (the "Company"),
Colorado Spectra 1, LLC, Colorado Spectra 2, LLC, Colorado Spectra 3, LLC
(collectively, the "Original Spectra Entities"), Colorado Spectra 4, LLC,
("Spectra 4" and, together with the Original Spectra Entities, the "Spectra
Entities"), Sundance Assets, L.P., as successor in interest to Enron Capital &
Trade Resources Corp. ("Sundance") and Sheldon S. Ohringer:
WHEREAS, the Company and Spectra 4 have proposed to enter into a certain
Equity Investment Agreement pursuant to which the Company may require Spectra 4
to purchase up to $50.0 million of the Company's Series B Common Stock, $.0001
par value per share (the "Shares") at a purchase price per share of $7.50 (the
"Offering");
WHEREAS, the right of first refusal set forth in Section 4 of that certain
Amended and Restated Investor Rights Agreement, dated as of April 13, 1998, as
amended (the "Rights Agreement") among the Company and the Investors, as that
term is defined in the Rights Agreement, may be waived, on behalf of each and
every Eligible Holder, as that term is defined in Section 4.1 of the Rights
Agreement, and as amended by that certain First Amendment to the Investor Rights
Agreement dated as of September 28, 1998 entered into by and among the Company,
Enron Capital and Trade Resources Corp., and the Original Spectra Entities,
pursuant to Section 5.5(b) of the Rights Agreement, with the written consent of
the Company, the Spectra Entities, Sundance and the holders of not less than a
majority of the then outstanding Registrable Securities, as that term is defined
in the Rights Agreement (the "Requisite Holders");
WHEREAS, as a condition to consummating the transactions contemplated by
the Equity Investment Agreement, Spectra 4 shall require that the Company extend
to it all registration rights, information and other rights as set forth in the
Rights Agreement, and the Company and the parties to the Rights Agreement are
willing to amend the Rights Agreement to allow Spectra 4 to have the same rights
given to them pursuant to the Rights Agreement with regard to the Shares;
WHEREAS, the Rights Agreement may be amended or modified only upon the
written consent of the Requisite Holders; and
WHEREAS, the undersigned constitute the Requisite Holders and, together
with Sheldon S. Ohringer, constitute the Eligible Holders.
<PAGE>
NOW, THEREFORE, in order to induce Spectra 4 to purchase the Shares and to
allow the Company to enter into the Equity Investment Agreement and to offer the
Shares in the Offering:
1. The undersigned hereby waive, on behalf of all Eligible Holders and any
other persons or entities claiming by or through such Eligible Holders, any
application, in connection with the Offering, of the right of first refusal
set forth in the Rights Agreement, and further waive, only with respect to
the Offering, compliance by the Company with all provisions of the rights of
first refusal, including the notice provisions.
2. The undersigned hereby amend the Rights Agreement as follows:
Spectra 4 is added as a party to the Rights Agreement
Spectra 4 is added as an "Investor" under the Rights Agreement as such
term is defined therein.
Spectra 4 is added as a "Sturm Entity" under the Rights Agreement as such
term is defined therein.
The definition of "Demand Shares" is hereby be amended to read, in its
entirety:
"'Demand Shares' means Registrable Securities which are (i) Series C
Conversion Shares, (ii) Common Warrant Shares, (iii) Series A
Conversion Shares, (iv) New Equityholder Warrant Shares, (v) shares of
Series B Common Stock purchased by Spectra 3 or Enron pursuant to
Section 1.c of the Common Stock Purchase Agreement dated as of
December 30, 1997, as amended, by and among the Company and the New
Equityholders, and (vi) shares of Series B Common Stock purchased by
Colorado Spectra 4, LLC, pursuant to the Equity Investment Agreement,
dated as of December 2, 1999, by and among the Company and Colorado
Spectra 4, LLC."
The first sentence of the definition of "Registrable Securities" is
hereby amended to read, in its entirety:
"'Registrable Securities' means (i) the Common Warrant Shares, (ii)
the Financial Advisor Warrant Shares, (iii) the New Warrant Shares,
(iv) Series B Conversion Shares, (v) Series C Conversion Shares, (vi)
Series A Conversion Shares, (vii) shares of Series B Common Stock
issued or issuable upon exercise of the New Equityholder Warrants,
(viii) any shares of Series B Common Stock Purchased by Spectra 3 or
Enron pursuant to Section 1.c of the Common Stock Purchase Agreement
dated as of December 30, 1997, (ix) shares of Series B Common Stock
purchased by Colorado Spectra 4, LLC, pursuant to the Equity
Investment Agreement, dated as of December 2, 1999, by and among the
Company and Colorado Spectra 4, LLC, and (x) any shares of Series B
Common Stock of the Company issued as (or issuable upon conversion or
exercise of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange for or
in replacement of such above-described securities."
<PAGE>
Except as modified by this Amendment and Waiver, the Amended and Restated
Investor Rights Agreement, as previously amended, shall continue in full force
and effect in accordance with its terms.
3. This Amendment and Waiver may be executed in counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment and Waiver
of Right of First Refusal effective as of the date first written above:
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ Sheldon S. Ohringer
-----------------------------
Sheldon S. Ohringer COLORADO SPECTRA 1, LLC
President and Chief Executive Officer
By: /s/ Donald L. Sturm
--------------------------------
Chairman and Chief
Title: Executive Officer
-----------------------------
COLORADO SPECTRA 2, LLC
By: /s/ Donald L. Sturm
--------------------------------
Chairman and Chief
Title: Executive Officer
----------------------------
COLORADO SPECTRA 3, LLC
By: /s/ Donald L. Sturm
--------------------------------
Chairman and Chief
Title: Executive Officer
-----------------------------
SUNDANCE ASSETS, L.P.
By: /s/ Stephen R. Horn
--------------------------------
Title: Vice President
-----------------------------
/s/ Sheldon S. Ohringer
------------------------------------
Sheldon S. Ohringer
COLORADO SPECTRA 4, LLC
By: /s/ Donald L. Sturm
--------------------------------
Chairman and Chief
Title: Executive Officer
-----------------------------
<PAGE>
EXHIBIT 10.9
FIRSTWORLD COMMUNICATIONS, INC.
AMENDMENT OF SECURITYHOLDERS AGREEMENT
This AMENDMENT OF SECURITYHOLDERS AGREEMENT (the "Amendment"), effective as
of December 2, 1999, is entered into by and among FirstWorld Communication, Inc.
(the "Company"), Colorado Spectra 1, LLC, Colorado Spectra 2, LLC, Colorado
Spectra 3, LLC (collectively, the "Original Spectra Entities"), Sundance Assets,
L.P., as successor in interest to Enron Capital & Trade Resources Corp.
("Sundance") and Colorado Spectra 4, LLC ("Spectra 4"):
WHEREAS, the Company and Spectra 4 have proposed to enter into a certain
Equity Investment Agreement pursuant to which the Company may require Spectra 4
to purchase up to $50.0 million of its Series B Common Stock, $.0001 par value
per share (the "Shares") at a purchase price per share of $7.50 (the
"Offering");
WHEREAS, the terms of that certain Securityholders Agreement, dated as of
December 30, 1997, by and among the Company, Sundance and the Original Spectra
Entities (the "Securityholders Agreement"), may be amended only upon the written
consent of the parties thereto pursuant to Section 9.07 of that agreement (the
"Requisite Holders");
WHEREAS, as a condition to consummating the transactions contemplated by
the Equity Investment Agreement, the parties thereto shall require that Spectra
4 receive the same rights and be subject to the same obligations with respect to
the Shares as set forth in the Securityholders Agreement, and the Company and
the parties to the Securityholders Agreement are willing to amend the
Securityholders Agreement to allow Spectra 4 to have the same rights and be
subject to the same obligations as the parties thereto; and
WHEREAS, the undersigned constitute the Requisite Holders:
NOW, THEREFORE, in order to induce the Company to into the Equity
Investment Agreement and to offer the Shares in the Offering:
4. The undersigned hereby amend the Securityholders Agreement as follows:
Spectra 4 is added as a party to the Securityholders Agreement.
Spectra 4 is added as a "Holder" as defined in the Securityholders
Agreement.
Spectra 4 is added as a member of the "Sturm Group" as defined in the
Securityholders Agreement.
Except as modified by this Amendment, the Securityholders Agreement shall
continue in full force and effect in accordance with its terms.
<PAGE>
5. This Amendment may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the undersigned has executed this Amendment
Securityholders Agreement effective as of the date first written above:
FIRSTWORLD COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
<S> <C>
By:/s/ Sheldon S. Ohringer
-------------------------------------
Sheldon S. Ohringer COLORADO SPECTRA 1, LLC
President and Chief Executive Officer
By: /s/ Donald L. Sturm
-------------------------------------
Title: Chairman and Chief Executive Officer
-------------------------------------
COLORADO SPECTRA 2, LLC
By: /s/ Donald L. Sturm
-------------------------------------
Title: Chairman and Chief Executive Officer
-------------------------------------
COLORADO SPECTRA 3, LLC
By: /s/ Donald L. Sturm
-------------------------------------
Title: Chairman and Chief Executive Officer
-------------------------------------
SUNDANCE ASSETS, L.P.
By: /s/ Stephen R. Horn
-------------------------------------
Title: Vice President
-------------------------------------
COLORADO SPECTRA 4, LLC
By: /s/ Donald L. Sturm
-------------------------------------
Title: Chairman and Chief Executive Officer
-------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.42
EQUITY INVESTMENT AGREEMENT
This Equity Investment Agreement (this "Agreement") dated as of December 2,
1999, is made by and among FirstWorld Communications, Inc., a corporation
incorporated under the law of the State of Delaware (the "Company") and Colorado
Spectra 4, LLC (the "Investor").
RECITALS
Whereas, the Company desires to obtain a commitment from the Investor to
invest an aggregate of up to $50.0 million to purchase the Company's Series B
Common Stock, subject to certain conditions set forth herein;
Whereas, the Investor is willing to commit to invest up to $50.0 million to
purchase the Company's Series B Common Stock upon request by the Company as more
fully described and subject to certain conditions set forth herein.
Now, Therefore, in consideration of the foregoing premises and the mutual
covenants and conditions herein contained, the parties hereto agree as follows:
1. Commitment to Invest.
(a) The Investor hereby agrees and irrevocably commits to purchase
shares of Series B Common Stock (the "Series B Shares") at a per share purchase
price of $7.50 per share (the "Purchase Price," as such Purchase Price may be
adjusted from time to time pursuant to Section 3 below) and having an aggregate
purchase price of up to $50,000,000 (the "Maximum Purchase") on one or more of
the following potential purchase dates: February 15, 2000, March 30, 2000, the
Trigger Purchase Date (as defined in Section 1(b) below) and the Expiration Date
(as defined in Section 10 below) (individually a "Purchase Date" and
collectively the "Purchase Dates") provided, however, that the following
conditions must be satisfied on each Purchase Date that the Investor is being
required to purchase Series B Shares in accordance with this Agreement: (i) the
Company shall have provided the Investor with a duly executed Written Notice of
Purchase and Sale (the "Notice") substantially in the form attached hereto as
Exhibit A not less than five Business Days prior to the relevant Purchase Date,
which Notice has been duly authorized by a majority of the Company's Board of
Directors that are disinterested within the meaning of Section 144 of the
Delaware General Corporation Law, (ii) the Company shall have elected to sell to
the Investor Series B Shares on the applicable Purchase Date with an aggregate
Purchase Price of no less than $7,500,000 (the "Minimum Purchase"), (iii) the
Company and the parties thereto shall have duly and validly amended its Amended
and Restated Investor Rights Agreement dated as of April 13, 1998, as amended
(the "Rights Agreement") pursuant to the Amendment to Investor Rights Agreement
and Waiver of Right of First Refusal attached hereto as Exhibit C (the
"Amendment of Investor Rights Agreement"), (iv) the Company and the parties
thereto shall have duly and validly amended the Securityholders Agreement, dated
as of September 28, 1998, pursuant to the Amendment of Securityholders Agreement
attached hereto as Exhibit E (the "Amendment of Securityholders Agreement"), and
(v) the Investor shall have received a legal opinion from Cooley Godward LLP,
special counsel to the Company, or such
<PAGE>
other outside counsel to the Company as is reasonably acceptable to the
Investor, substantially in form attached hereto as Exhibit D dated as of each
applicable Purchase Date. For purposes hereof, the term "Business Day" shall
mean any day (other than Saturday or Sunday) on which commercial banks are open
for business in New York, New York.
(b) In the event that the Company determines that its cash, cash
equivalents and marketable securities at any time prior to the Expiration Date
are less than or equal to $20,000,000, as calculated in accordance with
Generally Accepted Accounting Principals applied in a manner consistent with
prior periods (the "Trigger Event"), the Company shall be deemed to have
irrevocably elected to require the Investor to purchase Series B Shares on the
date that is not less than five business days after such Trigger Event (the
"Trigger Purchase Date") with an aggregate Purchase Price of $25,000,000 (the
"Trigger Purchase Amount"); provided that, the Trigger Purchase Amount shall be
reduced to the Maximum Purchase less the aggregate purchase price of the Series
B Shares that the Investor has purchased hereunder prior to the Trigger Purchase
Date (if the result of this calculation is less that $25,000,000); provided
further, that in no event can the Trigger Purchase Amount be less than the
Minimum Purchase.
(c) At each Purchase Date in respect of which the Company has
exercised its right to cause the sale of the Series B Shares to the Investor,
the Company and the Investor shall execute a Subscription Agreement in the form
attached hereto as Exhibit B. Unless otherwise agreed to by the Company and the
Investor, the settlement and closing of each purchase and sale of Series B
Shares shall occur at 10 a.m. (Denver time) on the applicable Purchase Date at
the offices of the Company. At each such closing, the Company shall deliver
physical share certificates for the Series B Shares so purchased against payment
therefor in same-day funds.
2. Commitment Fee. In consideration for the commitment set forth herein,
the Company shall pay to the Investor a commitment fee of $5,000,000
("Commitment Fee") within three Business Days following the satisfaction of the
conditions to effectiveness set forth in Section 8 hereof.
3. Adjustments in Purchase Price. In the event of changes in the
outstanding Series B Common Stock of the Company by reason of stock dividends,
split-ups, recapitalizations, reclassifications, combinations or exchanges of
shares, separations, reorganizations, liquidations, or the like, the Purchase
Price shall be correspondingly adjusted to provide the Investor with the total
number, class, and kind of shares as the Investor would have received had the
Investor been required to purchase any remaining commitment to purchase Series B
Shares hereunder immediately prior to such event and had the Investor continued
to hold such shares until after the event requiring such adjustment.
4. Obligations of Investor Absolute. The obligations of the Investor to
purchase Series B Shares is irrevocable and unconditional (except for the
conditions set forth herein) and shall be unaffected by:
(a) the existence of any claim, setoff, defense or other right which a
Investor may have against the Company, another Investor or any other person; or
2.
<PAGE>
(b) the bankruptcy, insolvency, liquidation or dissolution of any
Investor and the occurrence of any other proceeding as a result of such
bankruptcy or insolvency.
5. Representations and Warranties of the Investor. The Investor hereby
represents and warrants to the Company as follows:
(a) It is duly organized and validly existing under the laws of its
state of organization and has all requisite power and authority (including,
without limitation, all governmental licenses, permits and other approvals) to
own or lease and operate its properties and to carry on its business as now
conducted and as proposed to be conducted. It has full authority and power to
enter into, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby and has taken all necessary
action to authorize the execution, delivery and performance by it of this
Agreement.
(b) This Agreement has been duly executed and delivered by it. This
Agreement constitutes the legal, valid and binding obligation of it, enforceable
against it in accordance with its terms. No authorization or approval or action
by, and no notice to or filing with, any governmental authority or any other
third party is required for the due execution, delivery, recordation, filing or
performance by it of this Agreement, or for the consummation of the transactions
contemplated hereby.
(c) The acquisition of the Series B Shares by the Investor is for the
Investor's own account, is for investment purposes only, and is not with a view
toward the distribution of any of the Series B Shares. The Investor is not
participating and does not have a participation in any such distribution or the
underwriting of any such distribution. By the foregoing representations, the
Investor means that the Investor intends to hold the Series B Shares for
investment for the Investor's own account for an indefinite period of time. The
Investor understands that, in addition to complying with the restrictions upon
transfer contained in the legends to be placed on the certificates representing
the Series B Shares purchased hereunder (as described below), the Investor must
bear the economic risk of the investment in the shares for an indefinite period
because the Series B Shares has not been registered under the Securities Act of
1933, as amended (the "Securities Act"), and, therefore, are subject to
restrictions upon transfer such that the Series B Shares may not be sold or
otherwise transferred unless the Series B Shares is registered under the
Securities Act or an exemption from such registration is available.
(d) The Investor is an "Accredited Investor" as that term is defined
in Rule 501 promulgated under the Act and has such knowledge and experience in
financial and business matters that the Investor is capable of evaluating the
merits and risks of the prospective investment.
(e) The Investor is aware that no federal or state governmental
authority has made any finding of determination as to the fairness of an
investment in the Series B Shares, nor any recommendation or endorsement with
respect thereto.
(f) The Investor has had access to and an opportunity to inspect all
relevant information relating to the Company, including, but not limited to,
financial projections of the Company, sufficient to enable the Investor to
evaluate the merits and risks of the Investor's
3.
<PAGE>
purchase of the Series B Shares hereunder. The Investor also has had the
opportunity to read the Company's filings with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended, ask
questions to officers of the Company, and has received satisfactory answers
thereto, and has obtained such additional information as the Investor has
desired regarding the business, financial condition, and affairs of the Company.
6. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Investor as of the date of this Agreement and on
each Purchase Date on which the Investor is required to purchase Series B Shares
as follows:
(a) It is duly organized, validly existing and in good standing under
the laws of the State of Delaware and has all requisite power and authority
(including, without limitation, all governmental licenses, permits and other
approvals) to own or lease and operate its properties and to carry on its
business as now conducted and as proposed to be conducted. It has full authority
and power to enter into, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby and has taken
all necessary action to authorize the execution, delivery and performance by it
of this Agreement.
(b) This Agreement has been duly executed and delivered by it. This
Agreement constitutes the legal, valid and binding obligation of it, enforceable
against it in accordance with its terms. No authorization or approval or action
by, and no notice to or filing with, any governmental authority or any other
third party is required for the due execution, delivery, recordation, filing or
performance by it of this Agreement, or for the consummation of the transactions
contemplated hereby.
(c) The maximum number of Series B Shares that the Company could be
required to issue hereunder have been duly authorized by all necessary corporate
action and reserved for issuance pursuant to the terms of this Agreement. When
issued in compliance with the provisions of this Agreement and the Company's
Restated Certificate of Incorporation, the Series B Shares issuable hereunder
will be validly issued, fully paid and nonassessable, will have the rights and
privileges set forth in the Company's Restated Certificate of Incorporation, and
will be free of any liens or encumbrances; provided, however, that the Series B
Shares may be subject to restrictions on transfer under state and/or federal
securities laws as set forth herein or as otherwise required by such laws at the
time a transfer is proposed.
(d) The issuance and sale of the Series B Shares hereunder are not
subject to any statutory preemptive rights or to any rights of first refusal
that have not been properly waived or complied with.
7. Affirmative Covenants. Each of the parties hereto agrees to comply in
all respects with all applicable laws of any relevant jurisdiction, except where
the failure to comply could not reasonably be expected to materially impair its
ability to perform its obligations hereunder. In addition, the Company agrees to
timely file a Form D as promulgated under the rules and regulations under the
Securities Act such that the exemption provided thereby is available with
respect to the Series B Shares sold on each Purchase Date.
4.
<PAGE>
8. Conditions to Effectiveness of this Agreement. This Agreement shall
become effective (the "Effective Date") upon the receipt by the Company's Board
of Directors of a fairness opinion relating to the transaction contemplated by
this Agreement in form and substance reasonably acceptable to a majority of the
Company's Board of Directors that are disinterested within the meaning of
Section 144 of the Delaware General Corporation Law (the "Fairness Opinion
Condition").
9. Further Assurance. Each of the parties hereto agrees from time to time
to do and perform any and all acts and execute any and all documents as may be
necessary to effect the purposes of this Agreement or the consummation of the
transactions contemplated hereby.
10. Termination Date; Expiration Date; Termination Fee.
(a) Termination Date. This Agreement shall terminate (except for the
Company's obligation to pay the Termination Fee set forth in Section 10(c),
below), the right of the Company to cause the Investor to purchase the Series B
Shares shall expire, and the Company's obligation to pay the Commitment Fee
shall be fully and finally released on the earlier of (i) the Company's written
notification to the Investor that a majority of the Company's Board of Directors
that are disinterested within the meaning of Section 144 of the Delaware General
Corporation Law, or a committee appointed thereby, have determined in good faith
that the Fairness Opinion Condition cannot be satisfied and (ii) January 15,
2000 (the "Termination Date") in the event the Effective Date has not occurred
prior to such date.
(b) Expiration Date. If the Agreement has become effective, then this
Agreement and the right of the Company to cause the Investor to purchase the
Series B Shares shall expire on the earlier of: (i) 180 days following the
Effective Date and (ii) the closing of a firmly underwritten public offering of
shares of the Company's equity securities pursuant to the Securities Act (the
date set forth in (i) or (ii) above, the "Expiration Date").
(c) Termination Fee. In the event this Agreement terminates for the
reasons set forth in Section 10(a), the Company shall pay to the Investor a
termination fee (the "Termination Fee") equal to (i) $5,000,000, times (ii) a
fraction (A) the numerator of which is the number of days that have elapsed from
the date of this Agreement to and including the Termination Date and (B) the
denominator of which is 180; provided that, notwithstanding the foregoing, the
Company shall not be obligated to pay the Termination Fee in the event that the
Company does not receive from an independent investment banking firm of national
recognition an opinion, based on materially accurate assumptions, concluding
that the transaction is fair from a financial point of view to the Company's
stockholders. The Termination Fee shall be payable within three Business Days
following the Termination Date.
11. Miscellaneous.
(a) Notices. All notices, requests or consents provided for or
permitted to be given under this Agreement must be in writing and are effective
on actual receipt by the intended recipient or by delivery to the address or
facsimile number for the recipient listed below:
5.
<PAGE>
FirstWorld Communications, Inc.
8390 E. Crescent Parkway, Suite 300
Englewood, CO 80111
Attn: General Counsel
Facsimile: (303) 874-8010
With a copy to:
Cooley Godward LLP
2595 Canyon Blvd., Suite 250
Boulder, CO 80302
Attn: Michael L. Platt
Facsimile: (303) 546-4999
Colorado Spectra 4, LLC
3033 East First Avenue, Suite 200
Denver, CO 80206
Attn: Chairman and Chief Executive Officer
Facsimile: (303) 321-4444
with a copy to:
Sturm Group, Inc.
3033 East First Avenue, Suite 200
Denver, CO 80206
Attn: Richard H. Siegel, Esq.
Facsimile: (303) 394-5301
Notwithstanding the foregoing, notice given by facsimile shall be deemed
received only if received during normal business hours, and if received other
than during normal business hours shall be deemed received as of the opening of
business on the next business day. Any party may change the address to which
notices are to be directed to it by notice to the other parties in the manner
specified above.
(b) Amendments, Etc. No amendment or waiver of any provision of this
Agreement shall in any event be effective unless the same shall be in writing
and signed by all parties hereto, and then such amendment or waiver shall be
effective only in the specific instance and for the specific purpose for which
given. No failure on the part of any party hereto to exercise and no delay in
exercising any right hereunder, shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right.
(c) Assignment. Neither party can transfer its rights or obligations
under this Agreement, in whole or part, without the prior written consent of the
other party, except that the Investor may assign its obligations under this
Agreement to an Affiliate of the Investor, provided that the original Investor
remains liable for satisfaction of any obligation hereunder not timely
6.
<PAGE>
satisfied by the assignee of the Investor. For purposes hereof, the term
Affiliate shall have the meaning set forth in Rule 405 promulgated under the
Securities Act.
(d) Counterparts; Facsimile. This Agreement may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, all of which shall together constitute one and the same instrument
when so executed. This Agreement may be executed and delivered by facsimile.
(e) Headings Descriptive. The headings of the several sections and
subsections of this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.
(f) Severability. In case any provision in or obligation under this
Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, and enforceability, of the remaining provisions or obligations, or of
such provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired thereby.
(g) Jurisdiction.
(i) Each party hereto hereby irrevocably and unconditionally
submits for itself and its property, to the nonexclusive jurisdiction of any
Colorado State Court or federal court of the United States of America sitting in
Denver, Colorado, and any appropriate appellate court thereof, in any action or
proceeding arising out of or relating to this Agreement, or for recognition or
enforcement of any judgment, and each party hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in any such Colorado State Court or, to
the extent permitted by law in such federal court. Each party hereto agrees that
a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that any party
may otherwise have to bring any action or proceeding relating to this Agreement
in the court of any jurisdiction.
(ii) Each party hereto irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any Colorado state or
federal court. Each party hereto hereby irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO, WITHOUT REGARD TO ITS
PRINCIPLES REGARDING CONFLICTS OF LAW.
(i) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT.
7.
<PAGE>
In Witness Whereof, the parties hereto have caused their duly authorized
officers to execute and deliver this Agreement as of the date first above
written.
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ Sheldon S. Ohringer
------------------------------
Name: Sheldon S. Ohringer
----------------------------
Title: President and Chief Executive Officer
--------------------------------------
COLORADO SPECTRA 4, LLC
By: /s/ Donald L. Sturm
------------------------------
Name: Donald L. Sturm
----------------------------
Title: Chairman and Chief Executive Officer
-------------------------------------
8.
<PAGE>
Exhibit A
Written Notice of Purchase and Sale
_____________, 2000
Colorado Spectra 4, LLC
3033 East First Avenue
Suite 200
Denver, CO 80206
Re: Equity Commitment
Pursuant to the Equity Investment Agreement dated as of December 2, 1999
(the "Equity Investment Agreement") between FirstWorld Communications, Inc., a
Delaware corporation, and the Investor, the Investor has committed to acquire an
aggregate up to $50,000,000 million of the Company's Series B Common Stock at a
purchase price of $7.50 per share, subject to adjustment as set forth in Section
3 of the Equity Investment Agreement. Subject to: (i) satisfaction of the
conditions set forth in the Equity Investment Agreement, including receipt of
full payment for the shares of Series B Common Stock to be sold to the Investor
and (ii) the Investor's execution of the Subscription Agreement, the Company
hereby irrevocably elects to sell to the Investor on the next Purchase Date
____________ shares of the Company's Series B Common Stock for the aggregate
purchase price of $_____ million.
The Company hereby certifies that the representations and warranties set
forth in Section 6 of the Equity Investment Credit Agreement are, and will be,
true and correct as if made on the date hereof and on the Purchase Date that is
the subject of this Notice.
The purchase of Common Stock by the Investor shall be pursuant to the
Subscription Agreement in the form attached to the Equity Investment Agreement
as Exhibit B.
Terms not otherwise defined herein shall have the meaning set forth in the
Equity Investment Agreement.
Very truly yours,
FirstWorld Communications, Inc.
By:
---------------------------------------
Its:
--------------------------------------
cc: Richard H. Siegel, Esq.
(Sturm Group, Inc.)
<PAGE>
Exhibit B
SUBSCRIPTION AGREEMENT
FOR
FIRSTWORLD COMMUNICATIONS, INC.
This Subscription Agreement (the "Subscription Agreement") dated as of
____________, 2000 is made by and among FirstWorld Communications, Inc., a
corporation incorporated under the law of the State of Delaware (the "Company"),
and Colorado Spectra 4, LLC (the "Investor").
Pursuant to the obligations of the Equity Investment Agreement dated as of
December 2, 1999, Investor hereby purchases and the Company hereby sells
____________ shares of the Company's Series B Common Stock (the "Shares") for an
aggregate purchase price of $_________. The closing of the sale and purchase of
the Shares under this Agreement (the "Closing") shall take place at 10:00 a.m.
(Denver time) on [February 15, 2000][March 30, 2000][Trigger Purchase Date which
date is _______________, 2000][the Expiration Date], at the offices of the
Company, or at such other time or place as the Company and the Investor may
mutually agree (such date is hereinafter referred to as the "Closing Date"). At
the Closing, the Company will deliver to the Investor physical certificates
representing the Shares, against payment of the purchase price therefor by check
or wire transfer made payable to the order of the Company in same-day funds.
The Investor hereby represents and warrants to the Company and its
representatives and agents that the representations and warranties made by it in
the Equity Investment Agreement are true and correct as of the date hereof. The
Company hereby represents and warrants to the Investor and its representatives
and agents that the representations and warranties made by it in the Equity
Investment Agreement are true and correct as of the date hereof. All
representations, warranties, and covenants contained in this Subscription
Agreement shall survive the Closing and the delivery of the Shares to Investor.
This Subscription Agreement shall be governed by, construed under, and
enforced in accordance with the laws of the State of Colorado.
Terms not otherwise defined herein shall have the meaning set forth in the
Equity Investment Agreement.
<PAGE>
This Subscription Agreement is executed and delivered by parties below on
the _____ day of ____________, 2000.
COLORADO SPECTRA 4, LLC
By:
----------------------------
Its:
----------------------------
FIRSTWORLD COMMUNICATIONS, INC.
By:
----------------------------
Its:
----------------------------
B-2
<PAGE>
EXHIBIT C
FIRSTWORLD COMMUNICATIONS, INC.
AMENDMENT TO INVESTOR RIGHTS AGREEMENT
AND WAIVER OF RIGHT OF FIRST REFUSAL
This AMENDMENT TO INVESTOR RIGHTS AGREEMENT AND WAIVER OF RIGHT OF FIRST
REFUSAL (the "Amendment and Waiver"), effective as of December 2, 1999, is
entered into by and among FirstWorld Communication, Inc. (the "Company"),
Colorado Spectra 1, LLC, Colorado Spectra 2, LLC, Colorado Spectra 3, LLC
(collectively, the "Original Spectra Entities"), Colorado Spectra 4, LLC,
("Spectra 4" and, together with the Original Spectra Entities, the "Spectra
Entities"), Sundance Assets, L.P., as successor in interest to Enron Capital &
Trade Resources Corp. ("Sundance") and Sheldon S. Ohringer:
WHEREAS, the Company and Spectra 4 have proposed to enter into a certain
Equity Investment Agreement pursuant to which the Company may require Spectra 4
to purchase up to $50.0 million of the Company's Series B Common Stock, $.0001
par value per share (the "Shares") at a purchase price per share of $7.50 (the
"Offering");
WHEREAS, the right of first refusal set forth in Section 4 of that certain
Amended and Restated Investor Rights Agreement, dated as of April 13, 1998, as
amended (the "Rights Agreement") among the Company and the Investors, as that
term is defined in the Rights Agreement, may be waived, on behalf of each and
every Eligible Holder, as that term is defined in Section 4.1 of the Rights
Agreement, and as amended by that certain First Amendment to the Investor Rights
Agreement dated as of September 28, 1998 entered into by and among the Company,
Enron Capital and Trade Resources Corp., and the Original Spectra Entities,
pursuant to Section 5.5(b) of the Rights Agreement, with the written consent of
the Company, the Spectra Entities, Sundance and the holders of not less than a
majority of the then outstanding Registrable Securities, as that term is defined
in the Rights Agreement (the "Requisite Holders");
WHEREAS, as a condition to consummating the transactions contemplated by
the Equity Investment Agreement, Spectra 4 shall require that the Company extend
to it all registration rights, information and other rights as set forth in the
Rights Agreement, and the Company and the parties to the Rights Agreement are
willing to amend the Rights Agreement to allow Spectra 4 to have the same rights
given to them pursuant to the Rights Agreement with regard to the Shares;
WHEREAS, the Rights Agreement may be amended or modified only upon the
written consent of the Requisite Holders; and
WHEREAS, the undersigned constitute the Requisite Holders and, together
with Sheldon S. Ohringer, constitute the Eligible Holders.
<PAGE>
NOW, THEREFORE, in order to induce Spectra 4 to purchase the Shares and to
allow the Company to enter into the Equity Investment Agreement and to offer the
Shares in the Offering:
1. The undersigned hereby waive, on behalf of all Eligible Holders and any
other persons or entities claiming by or through such Eligible Holders, any
application, in connection with the Offering, of the right of first refusal
set forth in the Rights Agreement, and further waive, only with respect to
the Offering, compliance by the Company with all provisions of the rights of
first refusal, including the notice provisions.
2. The undersigned hereby amend the Rights Agreement as follows:
Spectra 4 is added as a party to the Rights Agreement
Spectra 4 is added as an "Investor" under the Rights Agreement as such
term is defined therein.
Spectra 4 is added as a "Sturm Entity" under the Rights Agreement as such
term is defined therein.
The definition of "Demand Shares" is hereby be amended to read, in its
entirety:
"'Demand Shares' means Registrable Securities which are (i) Series C
Conversion Shares, (ii) Common Warrant Shares, (iii) Series A
Conversion Shares, (iv) New Equityholder Warrant Shares, (v) shares of
Series B Common Stock purchased by Spectra 3 or Enron pursuant to
Section 1.c of the Common Stock Purchase Agreement dated as of
December 30, 1997, as amended, by and among the Company and the New
Equityholders, and (vi) shares of Series B Common Stock purchased by
Colorado Spectra 4, LLC, pursuant to the Equity Investment Agreement,
dated as of December 2, 1999, by and among the Company and Colorado
Spectra 4, LLC."
The first sentence of the definition of "Registrable Securities" is
hereby amended to read, in its entirety:
"'Registrable Securities' means (i) the Common Warrant Shares, (ii)
the Financial Advisor Warrant Shares, (iii) the New Warrant Shares,
(iv) Series B Conversion Shares, (v) Series C Conversion Shares, (vi)
Series A Conversion Shares, (vii) shares of Series B Common Stock
issued or issuable upon exercise of the New Equityholder Warrants,
(viii) any shares of Series B Common Stock Purchased by Spectra 3 or
Enron pursuant to Section 1.c of the Common Stock Purchase Agreement
dated as of December 30, 1997, (ix) shares of Series B Common Stock
purchased by Colorado Spectra 4, LLC, pursuant to the Equity
Investment Agreement, dated as of December 2, 1999, by and among the
Company and Colorado Spectra 4, LLC, and (x) any shares of Series B
Common Stock of the Company issued as (or issuable upon conversion or
exercise of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange for or
in replacement of such above-described securities."
C-2
<PAGE>
Except as modified by this Amendment and Waiver, the Amended and Restated
Investor Rights Agreement, as previously amended, shall continue in full force
and effect in accordance with its terms.
3. This Amendment and Waiver may be executed in counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
C-3
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment and Waiver
of Right of First Refusal effective as of the date first written above:
FIRSTWORLD COMMUNICATIONS, INC.
By:
-----------------------------
Sheldon S. Ohringer COLORADO SPECTRA 1, LLC
President and Chief Executive Officer
By:
------------------------------
Title:
------------------------------
COLORADO SPECTRA 2, LLC
By:
------------------------------
Title:
------------------------------
COLORADO SPECTRA 3, LLC
By:
------------------------------
Title:
------------------------------
SUNDANCE ASSETS, L.P.
By:
------------------------------
Title:
------------------------------
------------------------------------
SHELDON S. OHRINGER
COLORADO SPECTRA 4, LLC
By:
------------------------------
Title:
------------------------------
C-4
<PAGE>
Exhibit D
FORM OF OPINION
________, ______
Colorado Spectra 4, LLC
3033 East First Avenue
Suite 200
Denver, CO 80206
Ladies and Gentlemen:
We have acted as counsel for FirstWorld Communications, Inc., a Delaware
corporation (the "Company"), in connection with the issuance and sale of up to
_________________ (__________) shares of the Company's Series B Common Stock
(the "Shares") to you pursuant to the Equity Investment Agreement, dated as of
December 2, 1999 (the "Purchase Agreement") and the Written Notice of Purchase
and Sale attached thereto as Exhibit A. We are rendering this opinion pursuant
to Section 1(a) of the Purchase Agreement. Capitalized terms used but not
defined herein have the respective meanings given to them in the Purchase
Agreement.
In connection with this opinion, we have examined and relied upon the
representations and warranties as to factual matters (but not legal conclusions)
contained in and made pursuant to the Purchase Agreement by the various parties
and originals, or copies certified to our satisfaction, of such records,
documents, certificates, opinions, memoranda and other instruments as in our
judgment are necessary or appropriate to enable us to render the opinion
expressed below.
In rendering this opinion, we have assumed: the genuineness and authenticity of
all signatures on original documents; the authenticity of all documents
submitted to us as originals; the conformity to originals of all documents
submitted to us as copies; the accuracy, completeness and authenticity of
certificates of public officials; and the due authorization, execution and
delivery of all documents (except the due authorization, execution and delivery
by the Company of the Purchase Agreement), where authorization, execution and
delivery are prerequisites to the effectiveness of such documents. We have also
assumed: that all individuals executing and delivering documents had the legal
capacity to so execute and deliver; that you have received all documents you
were to receive under the Purchase Agreement; that the Purchase Agreement is
obligations binding upon you; and that there are no extrinsic agreements or
understandings among the parties to the Purchase Agreement that would modify or
interpret the terms of the Purchase Agreement or the respective rights or
obligations of the parties thereunder.
Our opinion is expressed only with respect to the federal laws of the United
States of America, the General Corporation Law of the State of Delaware, and the
laws of the State of Colorado. We express no opinion as to whether the laws of
any particular jurisdiction apply, and no opinion
<PAGE>
to the extent that the laws of any jurisdiction other than those identified
above are applicable to the subject matter hereof. Our opinion in paragraph 3
below as to the validity, binding effect and enforceability of the Purchase
Agreement is premised upon the result that would obtain if a Colorado court were
to apply the internal laws of the State of Colorado to the interpretation and
enforcement of the Purchase Agreement. We are not rendering any opinion as to
compliance with any antifraud law, rule or regulation relating to securities, or
to the sale or issuance thereof.
Our opinion in paragraph 5 below is based on the representations of the Investor
contained in the Purchase Agreement.
On the basis of the foregoing, in reliance thereon and with the foregoing
qualifications, we are of the opinion that:
1. The Company has been duly incorporated and is a validly existing corporation
in good standing under the laws of the State of Delaware.
2. The Company has the requisite corporate power to own its property and assets
and to conduct its business as it is currently being conducted.
3. The Purchase Agreement, Subscription Agreement dated as of the date hereof,
the Amendment of Securityholders Agreement and the Amendment of Investor
Rights Agreement have been duly and validly authorized, executed and
delivered by the Company and constitute valid and binding obligations of the
Company enforceable against the Company in accordance with its terms, except
as rights to indemnity may be limited by applicable laws and public policy
and except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
affecting creditors' rights, and subject to general equity principles,
including specific performance, and to limitations on availability of
equitable relief, including specific performance.
4. The execution and delivery of the Purchase Agreement and the Subscription
Agreement and the issuance of the Shares pursuant to the Purchase Agreement
and Subscription Agreement do not violate any provision of the Company's
Restated Certificate of Incorporation or Bylaws.
5. The offer and sale of the Shares is exempt from the registration
requirements of the Securities Act, subject to the timely filing of a Form D
pursuant to Securities and Exchange Commission Regulation D.
6. The rights, preferences and privileges of the Shares are as stated in the
Restated Certificate of Incorporation of the Company. The Shares have been
duly authorized, and upon issuance and delivery against payment therefor in
accordance with the terms of the Purchase Agreement and the Subscription
Agreement, will be validly issued, outstanding, fully paid and
nonassessable.
7. The sale of the Shares is not subject to any statutory preemptive rights or,
to our knowledge, any contractual preemptive right or right of first
refusal, which have not been validly complied with or waived.
D-2
<PAGE>
This opinion is intended solely for your benefit and is not to be made
available to or be relied upon by any other person, firm, or entity without our
prior written consent.
Very truly yours,
Cooley Godward LLP
Michael L. Platt
D-3
<PAGE>
EXHIBIT E
FIRSTWORLD COMMUNICATIONS, INC.
AMENDMENT OF SECURITYHOLDERS AGREEMENT
This AMENDMENT OF SECURITYHOLDERS AGREEMENT (the "Amendment"), effective as
of December 2, 1999, is entered into by and among FirstWorld Communication, Inc.
(the "Company"), Colorado Spectra 1, LLC, Colorado Spectra 2, LLC, Colorado
Spectra 3, LLC (collectively, the "Original Spectra Entities"), Sundance Assets,
L.P., as successor in interest to Enron Capital & Trade Resources Corp.
("Sundance") and Colorado Spectra 4, LLC ("Spectra 4"):
WHEREAS, the Company and Spectra 4 have proposed to enter into a certain
Equity Investment Agreement pursuant to which the Company may require Spectra 4
to purchase up to $50.0 million of its Series B Common Stock, $.0001 par value
per share (the "Shares") at a purchase price per share of $7.50 (the
"Offering");
WHEREAS, the terms of that certain Securityholders Agreement, dated as of
December 30, 1997, by and among the Company, Sundance and the Original Spectra
Entities (the "Securityholders Agreement"), may be amended only upon the written
consent of the parties thereto pursuant to Section 9.07 of that agreement (the
"Requisite Holders");
WHEREAS, as a condition to consummating the transactions contemplated by
the Equity Investment Agreement, the parties thereto shall require that Spectra
4 receive the same rights and be subject to the same obligations with respect to
the Shares as set forth in the Securityholders Agreement, and the Company and
the parties to the Securityholders Agreement are willing to amend the
Securityholders Agreement to allow Spectra 4 to have the same rights and be
subject to the same obligations as the parties thereto; and
WHEREAS, the undersigned constitute the Requisite Holders:
NOW, THEREFORE, in order to induce the Company to into the Equity
Investment Agreement and to offer the Shares in the Offering:
4. The undersigned hereby amend the Securityholders Agreement as follows:
Spectra 4 is added as a party to the Securityholders Agreement.
Spectra 4 is added as a "Holder" as defined in the Securityholders
Agreement.
Spectra 4 is added as a member of the "Sturm Group" as defined in the
Securityholders Agreement.
Except as modified by this Amendment, the Securityholders Agreement shall
continue in full force and effect in accordance with its terms.
<PAGE>
5. This Amendment may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the undersigned has executed this Amendment
Securityholders Agreement effective as of the date first written above:
FIRSTWORLD COMMUNICATIONS, INC.
By:
-------------------------------------
Sheldon S. Ohringer COLORADO SPECTRA 1, LLC
President and Chief Executive Officer
By:
-------------------------------
Title:
-------------------------------
COLORADO SPECTRA 2, LLC
By:
-------------------------------
Title:
-------------------------------
COLORADO SPECTRA 3, LLC
By:
-------------------------------
Title:
-------------------------------
SUNDANCE ASSETS, L.P.
By:
-------------------------------
Title:
-------------------------------
COLORADO SPECTRA 4, LLC
By:
-------------------------------
Title:
-------------------------------
E-2
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
FIRST AMENDMENT TO THE EQUITY INVESTMENT AGREEMENT
This FIRST AMENDMENT TO THE EQUITY INVESTMENT AGREEMENT (the "Amendment"),
effective as of December 22, 1999, is entered into by and among FirstWorld
Communications, Inc. (the "Company") and Colorado Spectra 4, LLC ("Spectra 4"):
WHEREAS, the Company and Spectra 4 have entered into a certain Equity
Investment Agreement, dated as of December 2, 1999 (the "Equity Agreement")
pursuant to which the Company may, subject to certain conditions and
limitations, require Spectra 4 to purchase up to $50.0 million of its Series B
Common Stock, $.0001 par value per share (the "Shares") at a purchase price per
share of $7.50 (the "Offering");
WHEREAS, pursuant to Section 11(b) of the Equity Agreement the terms
thereof may be amended only upon the written consent of each of the parties
thereto (the "Requisite Holders");
WHEREAS, the parties to the Equity Agreement desire to amend that agreement
as set forth below; and
WHEREAS, the undersigned constitute the Requisite Holders:
NOW, THEREFORE, in consideration of the premises and the mutual promises
set forth herein, Section 2 of the Equity Agreement is hereby amended to read,
it its entirety, as follows:
Commitment Fee. In consideration for the commitment set forth herein, the
Company shall pay to the Investor a commitment fee of $5,000,000 (the
"Commitment Fee") upon the earlier to occur of the following: (i) the first
Purchase Date, (ii) the closing of a firmly underwritten public offering of
shares of the Company's equity securities pursuant to the Securities Act of
1933, as amended, or (iii) a Sale of the Company. For purposes of this Section
2, the term "Sale of the Company" shall mean (A) any consolidation or merger of
the Company with or into any other corporation or other entity or person, or any
other corporate reorganization, transaction or series of transactions in which
the stockholders of the Company immediately prior to such consolidation, merger
or reorganization, own less than 50% of the Company's voting power immediately
after such consolidation, merger or reorganization; (B) any transaction or
series of related transactions in which in excess of fifty percent (50%) of the
Company's outstanding voting power is transferred; or (C) the sale, lease or
other disposition of all or substantially all of the assets of the Company.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this First Amendment of
Equity Investment Agreement effective as of the date first written above:
FIRSTWORLD COMMUNICATIONS, INC. COLORADO SPECTRA 4, LLC
By: /s/ Sheldon S. Ohringer By: /s/ Donald L. Sturm
------------------------------------- ---------------------------
Sheldon S. Ohringer Chairman and Chief
President and Chief Executive Officer Title: Executive Officer
-------------------------
<PAGE>
Exhibit 21.1
List of Registrant's Subsidiaries
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP
--------------------
NAME OF SUBSIDIARY STATE OF FORMATION BY REGISTRANT
- ------------------ ------------------ -------------
<S> <C> <C>
FirstWorld, Inc. Colorado 100%
FirstWorld Anaheim California 100%
FirstWorld SoCal California 100%
FirstWorld Orange Coast California 100%
FirstWorld SGV California 100%
FirstWorld Engineering California 100%
Optec, Inc., d/b/a FirstWorld Oregon 100%
Northwest, Inc.
Sirius Solutions, Inc. d/b/a California 100%
Sirius Connections, Inc.
Hypercon, Inc. Texas 100%
InQuo Nevada 100%
Intelenet Communications, Inc. California 100%
Internet Express, LLC Colorado 100%
Oregon Professional Services, Oregon 100%
Inc. d/b/a Transport Logic
Accelerated Information, Inc. California 100%
Slip.Net, Inc., a wholly owned California 100%
subsidiary of Accelerated
Information, Inc.
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated December 14, 1999, except as to the subsequent event in Note 14,
which is as of December 22, 1999, relating to the financial statements of
FirstWorld Communications, Inc., which appears in such Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
PricewaterhouseCoopers, LLP
Denver, Colorado
December 22, 1999
